Personal Budget – Financial Freedom

Is it time to get a grip on your finances and reach your financial goals?

Welcome to Part 1 in a series to assist in building your own comprehensive personal financial budget.  I have been using this technique for 20 years and find it works no matter what stage of life you are in or income level.

Less than 50% of Canadians have financial budgets and a greater percentage cite finances being their top stress in their lives and relationships.

Many websites and budgeting apps try to tell you what percentage you should allocate towards each aspect of your life: Shelter, Debt, Entertainment, Food, etc.

This is great if you are just starting out have the discipline to allocate your income in a perfect world from the get go, what happens when you current life style and expenses do not follow the “formula”;

My approach: I assume you already have income, already have bills, potentially have some debt, but do not have a real good handle on your finances and want to do better. So in other words, everyone!!

Full Disclosure: This plan is fiscally conservative by nature, it err’s on the conservative side when looking at calculations and what is included when determining different amounts of savings and expenses (I will denote when below).  This is not translated to being cheap, but an approach to develop a financial contingency, once you are aware of your available spending budget, spend away! But use this conservative opportunity to save or pay down debt vs spend.

Keys Requirements for Any Budget

First and Foremost: creating a budget is easy, Discipline is not. The unexpected should be expected in any plan, budgets are no different.  However, by sticking to a comprehensive budget you should be able to whether most storms.  A budget is just a piece of paper, you need to follow through to see the results!

Secondly: Do not keep up with the Joneses.  Who are they anyway? Live within your budget and you will likely be in a better position than the Joneses who do not have a budget.  Budgeting is about being confident in your finances and taking away the stress. Not on buying the biggest house or car on debt.

Thirdly: Do Not $20 yourself to death. My budgeting technique provides you with spending money.  To often people do not understand the cost of small impulse buys, “It’s only $10, its only $20.”  Well just $20 per week = $1040 a year, towards vacation, xmas presents, or emergencies

The Budget

Your first step to financial understanding, budgeting, and eventual freedom is a snap shot of what you have left after essentials. Then we establish a mixture of savings and debt payoff from disposable income.

Once you have your snap shot you are already more successful that the majority of individuals, now you have the tools to evaluate how you may change the individual components to reach a goal.

As you will see below, a budget is fluid and interdependent. Need more disposable income, need more savings, find ways to reduce your expenses.

Side Discussion: We can address this more in a later post, 99 times out of 100, a family unit will be better off if the finances are joint. Yikes, I know, sometimes not a popular topic in todays world.  Let’s break it down: Some reasons people have their finances separate is because one person makes more than the other, or one person sends more than the other and is out of control.  This isn’t a problem that the finances are joint or separate, this is a problem that a family unit does not have a Budget.  Create a budget, know your limits, work within your limits, and I guarantee a family unit that communicates about money and lives to a budget will be better off in the long run.  Emotionally and Financially.

Let’s Get To It

Building your snapshot: I am including a spreadsheet to download, created in Apple Numbers so you can take anywhere in iCloud.  Feel free to follow along, you will need to gather your pay check and a history of your bills including mortgage. Online banking is a good source.

Net Income – Expenses – Essential Savings = Disposable Income = Living Expenses + Debt Repayment + Additional Savings

We are going to equalize everything monthly for now, so hears the math for the frequency of different payments that are not monthly.

  • Bi-weekly = amount * 26 / 12 = Monthly
  • Semi-Monthly = amount * 24 / 12 = Monthly
  • Weekly = amount * 52 / 12 = Monthly
  • Monthly = Monthly (yes I actually got that question)

Income

Start with your after tax pay check equalized monthly

  • In 2018, if you make more than $55,900 annually, your pay will increase by the after tax value of your CPP (Canadian Pension Plan) pay stub deduction amount. Consevative approach: use your after tax income from your oay check at the being of the year, once you are paid up on CPP use the extra income to pay down debt or additional savings.

Add any other Guaranteed sources of income (these should be permanent, if short term, do not include in income. Short term is less than 2 years) Short term should be directed to debt repayment or savings if you can.

Essential Expenses

We are going to focus on essentials first, I classify these expenses as the basic requirements for living outside of food:

  • Rent/Mortgage
  • Condo Fees if applicable
  • House Taxes
  • House Insurance
  • Utilities: Sometimes these are together on one bill so use your judgement.  Bills are usually more in winter than in the summer.  Use your expected winter bill amounts. (conservative)
    • House Heating/Gas
    • House Electrical
    • House Water
  • Minimum, or your current, debt repayment amount. I classify these are essential though there is a case to be made depending on the situation if consolidated loans or debt refinancing are a solution to lower these expenses, however, this is beyond the article scope as usually not a viable option in the majority of cases:
    • Line of credit
    • Credit Card Debt

Discretionary/Variable Expenses

Though still very important and likely locked in some may be variable.

  • Car loan
  • Car insurance per car
  • Communication – cell phone house phone
  • Cable/Internet

Now add anything else you are currently doing with a recurring payment:

  • House Cleaning?
  • House Alarm?
  • Music streaming services?
  • Monthly Subscriptions? Netflix? Amazon?
  • Charity?
  • Church?
  • Child Care?
  • etc.

Essential Savings

Let’s focus on savings/emergency funds, savings is a essential part of a budget to allow you room for emergencies, unforeseen expenses, retirements, etc.

This part may be a little confusing, but let’s break it down.

Here I will break my rule and cite a common budgeting rule, target a minimum of 10% of your after tax income. Set this aside for future purchases, emergencies, retirement, etc. I personally believe in this day and age, 10% is not enough for most families to reach financial independence, however, you do what you can do. So know that this 10% is a perfect start and something you definitely need to budget for, but if you can do more then please do!

We are going to budget a minimum 10% right off the bat.  In addition, list all of your current saving plans, mutuals funds, RRSP, TFSA, that come out of your account and we will compare how much you are saving to what you should be budgeting. (do not include company sponsored pension plans such as defined benefit or defined contribution, conservative approach)

If you have savings that comes right off your pay check, even better, include that as well.

How much is left over? Income – Essential Expenses – Discretionary Expenses – Savings = Disposable Income

Disposable Income

Good job, this is what you have left over, but not your spending account yet! Rather a combination for Additional Savings + Additional Debt Repayment + Living Expenses.

You MUST stay within your Disposable Income to not take on additional debt and to set aside additional funds for a loftier savings plan or future purchases.

Additional Savings and Additional Debt Repayment

In a future article I will go in to more depth regarding “Should I pay down debt or save?” Spoiler Alert: credit card debt you should work to pay down, but not all debt at the expense of your savings.

The point, however, is that your disposable income is your ticket to financial freedom. You use your disposable income to assist in paying down debt faster than you are today, or you set some money aside for a vacation or a future purchase.  The amount you do will determine how long it will take you reach your goal.

We have already factored in your loans and either your current debt repayment payments or the minimum payment. So for the time being let’s just leave this blank.  Once we have our budget completed we can play with this later. Same with additional savings.

Living Expenses and Discretionary Spending

Congratulations, this is finally the amount you have available to spend on both living essentials and entertainment…. but should you? Well, it will depend on your situation. Those with a large amount may think they won the lottery here, but remember, saving only 10% but living a lifestyle well above what your savings will provide you in the future will not lead you to financial freedom.

Expenses that fall in to Living Expenses include everything not listed above, for example:

  • Car gas
  • Groceries
  • Restaurants
  • Clothing
  • Impulse purchases
  • Personal hygiene
  • Pet expenses
  • Alcohol
  • Anything you can practically buy on a credit or debit card.

What is your disposable income?

Let me tell you, when I first started out, the amount I had left over was $20 per day.. that’s it.  What did I do? Easy, I didn’t spend any more, and I didn’t sacrifice savings.

Is yours negative?

Do not stress, this is the purpose of the exercise, be happy you now have a clearer picture of your finances, now it’s time to fix it.  There are only two ways, increase income or reduce expenses. If you can work more hours, take extra shifts, or if a raise is coming then great.  The key though, focus on the expenses side of the ledger. Start with Discretionary Expenses: Can you reduce you cable, internet, cell phone bill by taking a reduced package? Get rid of a house alarm? What about essential expenses? Can you turn down the heat? Are you living in a location you can not really afford? Touch your essential savings last as a rule.

Is it positive?

Great, divide the total amount by 30.. how much do you get?  This is essentially the daily spending you could have available. You need to stay within it, no questions asked.

Divide the total amount by your income.. what percentage do you get?

I will cover more about Living Expenses and Disposable Income in a future article and how it relates to the amount you “should” save or pay debt not to be in a position of a lessor life style in the future than today. Plus some tricks on how to remain disciplined. Want a homework project, work through the same budgeting process for your Living Expenses, start with more essential expenses like car gas, and groceries, put aside some money for additional savings and debt, and see what is left over for entertainment, eating out, etc.

Final Thoughts

You have successfully completed your Budget and Financial Snapshot, remember everything is interdependent.  Not saving enough for your future lifestyle, reduce your lifestyle and save more, create balance.  Not enough disposable income for Living Expenses, reduce your Discretionary Expenses.  You are in control of what you spend.

I have thrown a lot of math, numbers, and work at you, but I hope it was worth it! You should now have a very clear picture of your monthly budgeted finances. Now it’s up to you! Again you can download all of this information in an easy to fill out Apple Numbers spreadsheet here

Please leave any questions, comments, and success stories below! If you prefer to talk confidentially please email me

In upcoming articles I will explore:

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