Archive for the ‘Budgeting’ Category.

Make 2013 your best money year ever with this simple 5 step list

2013 is almost here and it is time to think about your finances for the new year and how to ensure they are in their best shape ever. With these simple steps and checklist, you can make it your best year ever. Most of these are things we have talked about extensively in the past, but we now put it in one clear unified list:

1-Start saving money: don’t delay! You have to start this from Day 1 and not miss a day. If you don’t already have a savings account, ensure you open one immediately to take advantage of the compound interested. If you live in Canada, ensure it is a TFSA account, which allows you to save up to $5,500 a year, with all interest earned being tax free.  And speaking of saving money, ensure you pay yourself first when getting paid at work.And last but not least, don’t forget to open up and contribute to an RRSP (or other retirement saving programs) which will help with your retirement as well as for tax sheltering purposes.

2-Have a Piggy Bank: yes, a piggy bank or any jar where you can save your coins and even bills. You may be asking yourself why you need a piggy bank if you already have a real saving account at the bank? Well, as per our previous advise , the more sources of savings you have, the more money you will accumulate. It is as simple as that. So having a piggy bank, in addition to your real saving account, will help you save more money. Throw in any spare change you don’t need in there. In fact, occasionally, you will have $5 or $10 bills that you don’t need to spend, why not throw these in there too? On Dec 31 or so of 2013, you get to open the jar and enjoy all this money for a vacation, a big purchase or just add it to your bank savings.

3-Review all your bills and subscriptions: go over all your monthly, bi-monthly, quarterly and other subscriptions you pay for on a regular basis.  This includes your home and auto insurance. See what can you downgrade (cable TV?) or even cancel (newspaper delivery?) Chances are, there will be things that you no longer need and can cancel. This will save you money monthly.  Since it is a new year, you want to start fresh with everything and this would be the ideal time to do this.

4-Review your budget: related to the previous step, go over your budget and review it in full. Is there anything that needs to change? Is there any item that can be downgraded, with the resulting money going towards your savings? If you can manage to find even $10 of saving a month from your budget, you have done a good job!

5-Think about your taxes for the new year: if your work situation was such that you had to pay back to the government when filing your income tax last year, you need to do something about it this year. Instead of paying the government more than you already have, why not take some steps to ensure you don’t or even get something back? While the scope of this article can’t cover what does or doesn’t qualify as an income-tax eligible expense, there are some basic ones that should be on everyone’s list. These include RRSPs, charitable donations, medical expenses etc. Ensure you have all of these in one envelope and label them with the appropriate year (2012, 2013 etc.) When income tax filing season is here, you will be ready.

Following the above steps will ensure you stay afloat financially in 2013 and have money to save, spend and enjoy.

Start planning now while you still have some hours left in 2012!

 

Easy solution to reduce spending: two bank accounts

Do you find yourself spending your paycheck within a few days and then nothing is left to pay off your bills, let alone for savings?

There is a simple solution: having two bank accounts.

One will be your central and main account, where your paycheck is deposited. You will use this to pay off bills. You will set this up to automatically transfer money to the other bank which is dedicated for discretionary spending. The amount you transfer will be determined by your budget of course.

The second one, will be just that, secondary, for discretionary spending. This is the money you can spend, without worrying about spending all of your money. As long as you separate your money-depending on what each one will be spent on-you won’t have to worry about spending most of your money on one thing and having little or nothing left for others (bills, saving etc.)

Alternatively, you can follow ‘envelope budgeting‘ and not worry about having to create two bank accounts.  With envelope budgeting, you withdraw the money as soon as you get paid and then allocate them-using a real envelope or something similar-to different categories.

Not to be ignored, this is all assuming you already have a ‘savings account’ to which you transfer money automatically.  If you don’t, you need to create one right away!

If you Budget for it, you won’t feel the pinch!

I noticed something about the way I pay for big purchases which may not be very obvious to people often: if I have budgeted for a big purchase, I will actually pay for it with a smile. In other words, I am not feeling a big pinch from having to pay so much money for something.

Reversely, when I haven’t budgeted for something or I am suddenly faced with an emergency purchase or payment, I do feel the hit to my pocket.

Yes, budgeting does make a huge difference when it comes to the psychology of buying or paying for something. It makes you pay with confidence and no regret or any financial pain.

The point is, if you budget for big purchases in advance, or if you have saved money for an emergency, you won’t feel a big hit from an unexpected emergency.

Certainly, for you to save for a big future purchase, you have to know about it in advance. The more time you have for it, the more you will be able to save. In other words, and unless your car is done or completely damaged in an accident, you can’t just wake up one day and decide you are going to buy a new car. Unless you are very rich or have already saved lots of money. Rather, you would would have a saving and budgeting timeline that starts at least 6 months to a 1 year in advance.

As for unexpected emergencies, such as fixing a leaky roof or replacing the furnace, you are expected to always have some money saved for an emergency. So it is not a matter of whether you will have an emergency or not, you should have money allocated for it regardless.

This of course is different from wasting money on something you don’t need just because you have the money. That is a totally different thing and nothing more than wasteful spending.

So, always budget for future expenses and emergencies even if you can’t predict them or see them in the horizon.

Family Budgeting for a Happier Life

Should a married couple have one family budget or should each do it on their own?

To begin with, it is best that we have a budget, period. As to the question of what is better, a combined or separate budgets, that is up for discussion.

Best way to Budget as a Family

Most families would actually have some sort of a combined budget, where the husband and wife agree on which items each will cover, how much will the two save etc. The idea is to sit down and talk, discuss what is coming in, who will pay for what, and how mush saving they need to make.

Going it alone without any discussions about the role that each will play is a recipe for disaster. ‘Financial issues’ is often cited as one of the major reasons why a lot of marriages end up failing and families splitting.  To be more specific, these couples often fail to discuss their situation and how they will budget as a family. The end result is disagreements over who will pay for what, what will they buy and what should wait etc. Another advantage to having a family budget is to act as a system of ‘checks and balances.’ In other words, if one family member wants to spend on something, they can’t just do it alone. They would have to discuss and agree on it with the other and come up with a decision. Of course, we are talking large purchases here.

Agreeing on a budget early in marriage is extremely important. In fact I would suggest couples sit down and discuss their budget even before they are married and living together.  It prepares you for what is to come and helps couples avoid any disappointments. Budgeting should depend on the income for each, what financial or debt obligations they already have and whether there is kids involved (yet).

 

How to Budget together?

One ideal way to budget for a family is to create a shared bank account-in addition to the individual accounts that each will have-where each will contribute a certain amount or percentage from every paycheck.  Using that account, you will then decide how you will pay for the various things, including shopping, mortgage, bills, kids expenses, saving for the future etc.

One reason why it is a good idea to create a shared bank account is to help couples feel like they are indeed working together for one common family purpose, as opposed to each working on their own. But like I mentioned already, that doesn’t negate the need for individual bank accounts for each because you still have to have a bank account where you can keep your money for any personal spending etc.

 

Budgeting for Kids in the Family

Although we will cover the role of children in a family budget in the future, for now, it is just important to remember that kids should have their own category in any budget. Whether it is for their own monthly spending, future education savings, parents should allocate something-however modest-to their kids.  Just because they are minor and don’t have a lot of expenses doesn’t mean you don’t account for them. Quiet the contrary actually. If you budget for them now, they will thank you later when they are ready to peruse a higher education.

 

If you are married with a family and don’t yet have a budget, get going right away. Create your first budget to ensure that you live a happier and more financially-secure life.

Adjusting your Lifestyle or Adjusting your Budget?

When something dramatic changes in your life, how do you respond? do you change your lifestyle around it or do you change your budget instead?
For example, given the sharp increase in the price of gas in the last few weeks, do you go back to your budget and increase the amount allocated for gas? or do you keep your budget the same and instead adjust your driving, by driving less for example? how about an extreme change in weather, say to much hotter or colder? do you make adjustments at home or do you change your budget to give more allowances for heat/AC bills?

These are questions you will likely face with a personal budget, and answering them will require some analysis and number crunching.

-Is the change permanent, short term or unknown? if it is a short-term change that won’t last for long, then you can go through it and do your best to adjust to it. In fact, if you are prepared financially, you may not even need to make any changes. If the change is permanent, then you will have to sit down and do some analysis in terms of what needs to change, your budget or your whole lifestyle.

-Which one will give you a better value and utility? it is not just about the money but the value and return you get (health, life, family etc.) In other words, changes to your budget may be the way to go if it will make your life better. Example would be in buying a car. When making the decision as to which car to buy, you may come across a car that will cost a little more and even more gas than what you currently have. But this car will give you and the family more value, safety and comfort overall, so it is worth adjusting your budget for it, for a better lifestyle.

-How easy is it to make changes to your lifestyle? if it is easier to make a budget change and almost impossible to change the way you go about your life to accommodate the new changes, then go for the former. If your company is experiencing a slow season and your hours are reduced as a result, you may not want to look for another PT job due to family commitments. In a scenario like this, you would find it hard to make changes to your lifestyle, so instead, you make changes to your budget by saving less money for example.

Can you make small changes to both? in certain situations, it may be easier to make small changes to both your lifestyle and budget, rather than a big change to one of the two.  This way, you may feel a smaller hit. Example would be the introduction of a new member to a family through birth. With a new baby in the family, you will have added expenses and time commitments, not to mention all the time and energy needed. You can’t respond to such a dramatic change to the nucleus of your family by simply modifying your budget only. You will have to do more changes to your lifestyle as well. You may need to stay home more often to take care of the baby. Of course, the alternative would be to hire a nanny and pay her well over $1,200 a month, which would probably obliterate your budget. But by making small changes to both your lifestyle and budget together, you get to feel a smaller sacrifice from this huge change to your life.

 

The point is that you will need to apply different changes depending on the situation. Once size doesn’t fit all. And as we already seen with some examples, you don’t always have to go with one and not the other, but can in fact incorporate small changes from both.  You should hardly ever resort to making dramatic changes to one and not touching the other. If it is a huge change, it is best to split the responsibility between both your budget and your lifestyle.

Just remember, one of the last things you should touch when adjusting your budget is your savings. It is easy to look at your savings and think it is the easiest thing to sacrifice but it doesn’t have to be. With careful planning and reassessment, you may realize that making small changes to your lifestyle may spare your savings from being reduced or even eliminated from your budget.

7 Advantages of Using a Personal Budget

Still not convinced that you need a budget to organize your personal finances? I will give you 7 great reasons to prove to you that having a budget is absolutely the right thing to do, and hopefully at the end will convince you that having one is better than not having one at all.

At the end of the day, no one can force you to do anything with your money. It is your choice. But let us face it, just because it is our money doesn’t mean we know what to do with it. Sometimes, it helps to take the advise of others and try it out, it may just work out for us.  After all, I only started budgeting myself last 2 years or so, after having ignored the concept for much of my adult life.

1-See the big picture: with a budget, you can easily see what is coming in, what is going out and what is staying in your hand. When you have such financial information handy, you will be better able to make important decisions that will help you now and in the future.

2-Financial Freedom: Have more money to spend on all your needs.  With a budget, you will set an amount for every category, this way, you will never have to spend all your money on one thing and not have anything left for other things. A budget ensures everything stays within its boundary and not be impacted by what you are spending on other things. With no budget, for example, you can spend your entire paycheck on paying for something big and not have anything left for other items.

3-See problems and adjust: are you spending too much on eating out? are you paying lots of interest on your credit card debt? with a budget, you will be able to see problems such as these and be able to correct or adjust them.

4-Helps with your saving: you know what you are spending on and what is left for saving or vise versa. With no budget, there is no visual or mental restriction on you and what you can spend your money on, so you could end up with no money for your savings.

5-Eliminate your debt: when you create and plan your budget, you will set a special category for ‘debt.’ The amount you allocate to this category will depend on how big your debt is,how big your income is etc.  Nevertheless, to be able to dedicate a specific fixed amount from every paycheck that will go towards the paying off of your debt will mean that you will be consistent and not have to miss any payments or fall behind. Again, the idea is that a budget is like a map where the boundaries are clear and there is no risk of one taking over another. So you can keep paying your debt while still setting aside money for saving.

6-Serves as a mirror of your financial situation: by laying it all out in a budget, including your income, spending and money leftover for saving, you will be able to judge your situation and decide what needs to change. Is the money you are making not enough, and as a result, need a new better paying job? or are your spending out of control and you need to do something about it? A budget will help you see your current status and you can then decide what you need to change.  You never know, a simple budget could be your motivator to change careers to a better paying one.

7-Eliminate Stress: a budget will help you eliminate both your debt and the stress that comes with it. Think about it: a budget is like those ‘debt consolidation plans’ that you have likely been hearing a lot of lately. Only difference, with a budget, you pay down your debt without any concession or major sacrifices to creditors and banks etc. Not to mention, it could even save you from going in the path of declaring personal bankruptcy.

I hope these were enough reasons to convince you of the importance of having a budget. If you think creating and maintaining a budget is too much work, then you can start slow, maybe through envelope budgeting and then slowly evolve to full-fledged budgeting.

If you are still not convinced, let us know in the comments section.

Budget Turbluences and how to Control them

Your friends or relatives are visiting from out of  town, and you take them for dinner, movies and other fun places and by the end of the night, you have already blown your entire ‘personal and pleasure’ budget allocation for the entire week. To make matters worse,  it is only Saturday and you still have over a week till your next paycheck!

Life happens. As much as we preach about the importance of being disciplined and having complete control over your budget, you will inevitably go through circumstances that will force you to lose that control.  But this shouldn’t be the end of the world, nor should it make you give up on your budget altogether and forget about it. The fact that life can be unpredictable sometimes should be a reason for you to sit back and relax. Here are some effective methods on weathering such inevitable budget turbulence and storms, and bringing things under control again:

  • Take a deep breath and acknowledge the obvious: It is not the end of the world. Using a ‘health and weight loss’ analogy, occasionally, you will hit these bumps and splurges. Nothing wrong with it, as long as you don’t go through them every week. Like we already said, life happens, and there is nothing wrong with that.
  • Look at the big picture and adjust: how many days are there left in your current budget cycle? how much money will you need to borrow from your other budget categories? which category can afford to borrow from? if you go through these questions and take the time to answer them properly, you should be fine for the rest of the week, until the next paycheck.
  • Skip or cancel any big spending events: are you planning to hit the mall in the next few days? thinking of making a big purchase? you should forget about these until at least your next paycheck, unless the purchase was already budgeted for or is not big enough.
  • In extreme needs, use a credit card: although I don’t usually encourage the use of credit cards, I may be OK with it in extreme cases. And by extreme, I mean really extreme. A time where you really need to pay for something without a delay.   And be sure to pay it back right when you get your next paycheck, hopefully just a few days away. In this case, not much interest should accumulate, if any, since you are only a few days from your next paycheck.

 

At the end of the day, you should learn from it all.  At times like these, you will come to appreciate how budgeting helps organize your life.  While it may seem limiting, it is actually quiet liberating. If a budget didn’t exist, you could run into situations like these more often.  But even with a budget, you will run into these situations every now and then, but much less often. But it is OK, and you can easily bring things under control by following some of the points we outlined above.

Remember, if you don’t go through these tough stretches, you won’t learn much.

The Best and Easy way to Save for big purchases

In your budget, you would naturally have a ‘savings’ category for future emergencies or just general saving purposes. But what if you want to buy a fairly expensive item (at least hundreds of dollars and up to thousands) like a vacation, new furniture, or even a car?  Do you dip into your ‘savings’ and just take the money from there? No need to do that.  There is a better and more efficient solution.

Create a new category in your budget and dedicate it to the future item that you want to buy. For example, if you want to take a one week vacation to Mexico that will cost you about $800, create a new category in your budget and call it “Mexico Vacation” . Psychologically, it makes a big difference to make it as specific as possible by calling it “Mexico Vacation-August 201” and not just some general “Vacation.” This generally helps your brain become more focused on this, since you have a clear destination and timeline.

Where do you get extra money from?

Now to the other challenge: where do you get the money from? Just because you have to save for something new, doesn’t mean you have extra money to spare. Your income is still the same (unless you are due for a raise at work, or start a new PT job) First thing to do is to conduct a budget review, line by line, and see which categories can you afford to take some money from and transfer it to the new “Mexico Vacation – August 2011” category?
The easiest and most logical place to start from is your ‘Savings’ category. This is not to suggest that you will stop saving, and just put everything towards the Mexico vacation. Rather, you would take something small from it and reallocate it to the Mexico vacation. For example, if you put $125 from every paycheck towards your savings, you can take $25 from that and transfer it over to your “Mexico Vacation-August 2011” category. You are still saving, but just not the same. But no worries, you will go back to saving the same amount once you have saved enough money for the vacation.

Keep reviewing other items in your budget to determine which other ones can you afford to transfer money from to the “Mexico Vacation – August 2011” category. What about your personal spending? Maybe your weekly ‘Grocery and Food’ category?

Assuming we have about 12 more pay periods from now till August, and assuming you can dedicate some $60-75 per cycle to the ‘Mexico Vacation – August 2011’ category in your budget, you could achieve your $800 goal that is needed for the vacation, even before August.

Bit of Effort to Save a lot

As you can see, with some crative budget re-allocation, and very minor sacrifices (patiences and discipline) , you have saved for your Mexico vacation. In other words, with a bit of planning, you can afford to go to Mexico and still be able to carry on with most of your other life activities, including saving money.

Mind you, if we have a bigger item to worry about, like a car for example, then you should look at a longer timeline (one year is ideal) and making some more sacrifices, but nothing draconian.

Last, in emergency situations, you will have to dip into your savings, and maybe temporarily make big sacrifices. But if you have prepared for it, it won’t be as hard.

Budgeting is about Organization not Restriction, Efficiency not Sacrifices

Talk about ‘budgeting your money’ and some people get the wrong idea. They picture people restricting themselves from spending money, sacrificing their fun, and other unwanted and boring things. But they got it all wrong.

The fact of the matter is, setting up a budget helps you do everything you need. Without a budget, your spending is all over the place, and you risk overspending on certain things and having little or nothing for other items.

Personally speaking, before I started following a budget, it was very common for me to spend my paycheck within the first few days, before I even had a chance to pay other things including insurance and phone bills. This cost me a lot of money, including those hated ‘NSF’ charges by the bank. After starting to follow a budget, I am yet to experience these issues again.

Following a budget has also helped me do things that I couldn’t do or purchase before. Budgeting is about organization and not necessarily sacrifices. If you are reasonable and don’t have mountains of debt, your budget will make your life easier and more fun.

For those people who still think that budgeting is a waste of time and will force them to sacrifice certain things in life, I urge you to give it a try for at least 2-3 months.

At the end of the day-and this is the very definition of economics-our income and resources are finite yet our wants and needs are not, so we have to work and be creative with what we have. Otherwise, we wouldn’t need a budget.

Go ahead, create a budget, it will help you live a better life for now and in the future. Guaranteed!

What is and how to set up ‘Envelope Budgeting’

Once you have setup your budget, the next step is to physically organize your money. That is, where you will keep it and allocate it to different items in your budget.

We call it ‘Envelope Budgeting’ because you will normally use an envelope or some sort of a folder to store your money and organize it. The most ironic thing about this concept is that I was using it long before I knew it existed, until I read about it one day and realized that it actually exists as a concept in budgeting.

You will want to keep money for certain items in your bank ( mainly those fixed items that are withdrawn on a monthly basis) and withdraw the rest.

Once you have all your money in the envelope, start allocating it to different items in your budget. Use a large tag to label each item and enclose the money within the tag. Of course, the money you allocate to each item is already specified in your budget that you would have created here.

From here on, when you need money for grocery shopping, you take it from the money allocated for it in your envelope. The same for gas purchases and so on.

Once you get comfortable with this type of budget arrangement, you will appreciate the ease and the fact that you will never have to overspend on certain items and have no money left for others. Each item now has its own allotment and room, and there is no more risk of one jumping into the territory of the other (using gas money for example, to pay for dinning out)

Ever since I set up my Excel sheet budget and this envelope budgeting to help organize it physically, my finances have changed tremendously for the better. Although I generally still make the same money, it has become so much easier to spend and save. It is as if I have found or added a new source of income. It is all about budgeting and organizing your money.

If you don’t like paying by cash and prefer to use debt instead, then this whole concept of ‘Envelope Budgeting’ will no longer apply. This is not to suggest it is not doable by keeping your money in the bank, but it will be harder. Think about it: all the money will be pooled together and it will just be harder to separate than if you were to do it in an envelope with each having its own room and tag. Wouldn’t it be nice if banks introduced some form of ‘Envelope Budgeting’ too?

Remember the saying ‘if you fail to plan, you plan to fail,’ so get going and start budgeting your money.