Managing money in today’s world is increasingly complicated. Not only do we have more spending options than in the past, we now have more choices of how to pay — cash, cheque, credit card, debit card, pre-authorized withdrawals and through the Internet.
We all use our money in different ways, reflecting our values and priorities. Regardless of our financial personalities, what we decide to do with our money today will impact our lives tomorrow. That’s why taking control of our money right now — where it comes from and where it goes — is the first step towards a secure future.
A budget gives you an overall picture of where your money is coming from, when it’s coming in and how it’s being spent. Above all, a budget should be flexible, and change according to your circumstances.
Budgeting helps us achieve short-term goals like paying monthly bills, taking a course or paying off a credit card. It’s also for longer-term financial goals like buying a home, a car, paying for an education, a wedding or a holiday. When you take control of your financial affairs, you’re more confident about the future.
Who should budget?
Everyone. It gives you a "snapshot" of where you stand financially and where you’re headed. Don’t rely on anyone else to do your budgeting — take control of your own finances. Encourage your children to budget — it makes them realize the value of saving and achieving their own personal goals. Budgeting to buy a new comic book, a mountain bike or a pair of roller blades is the ideal way for kids to learn about the value of money and saving.
Where does your money go?
What are your expenses? Remember that if you know exactly where your money is going, only then can you decide if you’re spending it wisely. Use the budget worksheet provided to figure out your fixed and variable expenses. Consider the following:
- Fixed expenses: Those bills you have to pay and that tend to be the same amount month-to-month or year-to-year. They include: rent or mortgage payments, insurance, fees for education, car payments, furniture and appliance payments, payments on personal loans and credit cards, taxes for self-employed workers and your savings program.
- Variable expenses: The amounts that vary from month to month and over which you have some control. They include: food, clothing, utilities, transportation, long distance telephone, club memberships, vacations, household supplies, gifts and contributions, personal care, recreation, babysitting, pets, and money for other miscellaneous purchases.
- Your records: Keep well-maintained files that you can review. Include cancelled cheques, credit card statements, receipts and ABM/debit transactions and bank books.
Creating your own plan
Create a spending plan that will help you meet your financial obligations and reach your goals. This plan should act as a flexible guideline that can change overtime.
- Make a note of your fixed and variable expenses. When you total your expenses, they should be equal to or less than your income.
- If your first plan is too heavy on expenses, think about which expenses you can reduce without sacrificing the quality of your lifestyle.
- Look at variable expenses that may be reduced or postponed until a later date.
- Be sure to include an emergency fund. Try to build a cushion of three to six months to help you prepare for the unexpected.
- Once you have a good estimate of expenses, subtract that figure from your income. The remaining money is what you can use for your savings or goals.
- Not having a grip on your expenses: You need to figure out your spending habits and start keeping track of where your money goes. Watch impulse buying — it can get you into trouble.
- Not paying off high-cost, high-interest debts first: Think about consolidating your debts.
- Not having an emergency fund: Try to save three to six months worth of living expenses to get you through a financial crisis.
- Over-extending your credit cards: Be careful not to get into debt, especially when using credit cards. Pay off the balance every month to avoid interest charges.
- Not protecting yourself and your family with adequate life, medical, property and disability insurance: See an insurance specialist to make sure you’re properly covered.
- Not having an up-to-date will: Everybody should have a will — especially if you have dependents. If it’s more than three years old, review it; the law or your personal circumstances may have changed.
- Poor investing practices: Making all of your investments through one vehicle can be a devastating error — it’s better to diversify your portfolio.
- Not planning for retirement early enough: Set up a retirement savings plan as early as possible and try to contribute what you can afford.
- Not saving early for children’s education: Start saving by opening a Registered Education Savings Plan (RESP). The federal government adds to your contributions each year to help your child’s plan grow.
- Not having an understanding of tax benefits: Take full advantage of all of the tax credits and deductions available