November is Financial Literacy Month
Each week we will have a new topic for Financial LIteracy Month, and this week it is about Starting a Budget which can sometimes feel overwhelming.
By Shelley Koehli - Licensed Insolvency Trustee with D. Thode & Associates Inc. Vancouver
Week One - Start with a Budget
Starting a budget can sometimes feel overwhelming and there is a general fear that it will be restrictive once it’s done when the exact opposite is the case.
Having a budget will provide you with the information you need to start working on your financial goals, which is the subject of Week #2.
Before we start talking about budgeting, you need certain information about your income and expenses.
First, do you have regular monthly income (salary) or are you self-employed and have income that varies?
If you are self-employed, look at your records for the last 6 to 12 months and average your earnings net of tax and business expenses. If you have a family and receive government credits, include those in your monthly income. If you are separated or divorced, include any child support or alimony you are receiving. Do not include discretionary bonuses.
Secondly, do you know what your expenses are?
I find that many people spend much more on certain expenses than they imagine. The only way to really know is to track your expenses for a period of time. I recommend three months. Tracking expenses can seem like an onerous activity, but it really gives you the information you need to set yourself up for success. How many times do you go to the grocery store for one or two items and walk out with two full bags, or stop in at your favourite coffee shop for a little something on the way to work? All of these things can add up to a shocking amount of money, money that you could be putting to good use for things like savings, a weekend getaway, or a down payment on that car or home you’re hoping to purchase “one day”. One day these things can happen, if you focus your finances and spending. D. Thode offers credit counselling you are looking for help figuring things out.
There are three main categories of expenses:
1. Fixed expenses - These are expenses that don’t really change, for example your mortgage, rent or car payment.
2. Variable expenses - These are expenses that do fluctuate from month to month, such as groceries, eating out and gas.
3. Annual, Seasonal and Irregular Expenses - This category is very important. There are times throughout the year where you may have to come up with extra funds that you may not have set aside. If you are on a tight budget, unexpected car or home repairs can throw your finances into a tailspin. Other expenses that fall into this category would be school fees, summer camps, birthdays and other celebrations, not to mention dental expenses or annual insurance premiums. The list can go on and on depending on your family. Knowing what these expenses average out to over a year is important. Take a look at your banking transactions for the last year or two and see what you’ve spent so you can come up with an average monthly amount to incorporate into your budget.
It is important during this step to get an accurate idea of how you and your family are spending as there will be time later to adjust and make choices when you prepare to put your budget into action.
Here is an example of what a spreadsheet might look like after you’ve totaled your monthly spending:
Of course, this list is not comprehensive, and you should add any regular expenses that your family incurs, such as child support payments or pet expenses.
Shelley Koehli is a Licensed Insolvency Trustee and Chartered Insolvency and Restructuring Professional with D. Thode & Associates Inc. in British Columbia.
Please come back next week when we discuss Setting Financial Goals.