Budgeting 2 — How to simplify it
A second post about budgeting…
I bet you’re wondering how it could ever go more in depth from here, maybe thinking what else could we possibly go over for the fun topic of creating your budget? Well, first off I’ll start with a short re-cap of my last article which you can find it here. The first major point we covered, was how your budget is the cornerstone of your financial plan. Starting with this as your most basic tool, and understanding your different financial priorities can help you control you finances, pay your bills, and get you closer to that million-dollar retirement.
Looking closer at those financial priorities, we also looked at the difference between priorities that are “Need’s” and “Wants”. Need’s, being the guaranteed expenses you have to pay to maintain your lifestyle. Want’s being the variable expenses you budget for, that if you were to get rid of would still allow you to have your home/utilities/ etc. The last major point we went over, is taking your time horizon into account when planning your budget. Your time horizon, considers both short and longer-term goals you’ve set for yourself, that can range from going back to school, buying a house, or even retirement. These should be kept at the forefront of your mind when discussing your financial plan, as if you only ever look at your short-term needs, you’ll never be able to anticipate emergencies or prepare for your future.
Now let’s start off with today’s post, budgeting part 2. We went over the importance of looking at the short and long term, and planning for emergencies, but we’ll now look at planning for something more fun. When it comes to money, it’s not a fun subject. People who don’t have it, stress about not having it. People who do have it, stress about keeping it and hoarding it. How to make your financial plan fun? Well, your long-term plans can incorporate a life goal you might have!
One personal goal of mine, is to travel more. I was lucky enough to be in a family that travelled every year, and I was lucky enough to do student exchange programs around the world. One place that I love, and desperately want to get back to, is New York City. A good friend of my girlfriend and mine, is doing her Master’s degree in New York, and we were lucky enough to go visit and stay with her for a weekend. It was by far, one of the most fun weekends of my adult life. A fun goal for myself for travelling, is going back. That’s where a good budget comes into play. You can consider your living expenses, utility bills, retirement planning, but can also incorporate other savings for things you want, like travelling.
From all my client’s I’ve heard lots of goals they’ve set for themselves, travelling around the world, starting a business one day, save money for a new car, or to save for sporting equipment for a new sport. The important thing when it comes to your extra savings, is to make sure to not over-extend yourself. If we’re following our rules of thumb from my previous post, you want to make sure all your bills and essential expenses are covered, plus put away 10% of your income to savings. Every other dollar you have, can be allocated to anything you want, including spending money, or additional savings. The only time you should change your budget, is to change your additional savings/spending priorities, never your primary expenses. These, as I mentioned previously, are your fixed and variable expenses. The only time you should change the fixed expenses, are as the monthly amounts (rent/mortgage/cell phone plan/insurance/ etc.) change.
Now that you have your priorities set, let’s talk about how to go about putting it into motion! Let’s start with your accounts. When it comes to bank accounts, your advisor will always try upselling you. If you budget a chequing account for 25 transactions per month, your advisor will tell you to get a more expensive account that gives you unlimited transactions “just in case”. It’s a good idea in theory, you never know if you may need to use your account more, but when it comes to the accounts for your budget, you know 100% how many times per month you’ll be using it, how much it’s for, and what exactly it’s for.
This is where the basic savings account come into play. All banks are required by law to provide 2 types of account, a basic savings account with 0$ monthly fee, and 1 free transaction per month, as well as a basic chequing account for no more than $4.00/month, with at least 12 transactions per month. The best part, there’s no limit on how many bank accounts you want to open! Let’s take a look at those expenses again, to keep it basic we’ll say it’s Rent, Cell Phone/Internet, Retirement savings, and vacation savings, insurance. We know, that for rent, cell phone/internet, and insurance you will have to take the money out of the accounts once per month, and the others you only need to take it out once you’ve met your goals. You can set up all 4 of these as free savings, and utilizing your online banking, can name them to easily keep track of the balances.
That brings me to my next ranting point, the glorious tool that is online banking! Having access to your bank account whenever and wherever you want is immensely important to following a strict financial plan. With the introduction of direct deposit, online cheque deposit, cash/cheque deposits at ATM machines nation wide, it’s never been easier to see or access your money. Most banks today, are adding in online features that allow you to take photos of cheques to deposit, do international transfers online, everything to make your life easier.
These features help get the money into your account, but how does it help you with your budget? Well it comes down to automation. Most bills let you automatically deduct payments from your accounts, and a lot of these companies actually give you discounts and benefits for simply setting up your bills to have pre-authorization for debits. That helps money leave your accounts, but doesn’t help with moving them for your budget.
Whenever I’ve offered to take a lot of budgeting features in accounts for clients in the past the most common issue I hear is “I just like to control it myself.” Okay, that’s not a problem. What goes through my head? I wasn’t asking you to let me do the transfers for you, that’s a whole lot of extra work I didn’t have time for working 10-hour days as it was. All banks offer an exact same feature, in a lot of cases it’ll have a fancy bank acronym that the employee’s use, the one I dealt with was a PTS, or a Pre-Authorized Transfer Service. This allowed us to set up in your bank account to your exact specifications, the account that sends the money, the account that receives it, how much, and what day. If you are paid on a bi-weekly basis, let’s say every second Thursday, we would set up the PTS to have x.xx amount of dollar leave your chequing account, deposit it into your savings account, and it’s free of charge. Now, you can wake up in the morning, and while having your morning cup of coffee you can see in your bank account the money has already be budgeted away for you.
Let’s take a step back at my client’s objections, “I just like to control it myself.” That’s a fair argument, absolutely. The last thing we want to do is take comfort from our clients, and to take peace of mind away from them. One thing to keep in mind, is that if you are going to manually do it you have to be strictly disciplined with it. The biggest thing that can shoot you in the foot, is if you forget to do your transfer, or when the time the bill comes not enough money is in the account, you’re risking getting an Insufficient Charges Fee, which’ll usually show up in your account as “NSF-FEE”, and it ranges from $45 — $50 depending on which bank you’re with. The purpose of automating everything is to ensure that the money is always there when you need it.
The last important point to have in mind, is how often to review your budget. This part can range depending on who you talk to, some advisors recommend once every quarter (3 months), some recommend once per year. My answer? It depends. I hold to it that you should review your financial goals either on your own or with an advisor at LEAST once per year. But that’s a minimum, you should review it whenever a big change happens in your life. You bought that car you’re saving for? Review your finances. You’re going back to school (or to school for the first time)? Review. You get engaged? You get the idea.
When you budget anticipating your needs in the future, it helps relieve the stress when a change happens in your life that requires you to change. When you get married and start your family, it’s better to already be planning for the future, instead of panicking and trying to do it then and there.
That about wraps up my rant for budgeting. As a total recap over these two posts;
- Identify your goals, starting with what expenses you HAVE to pay, your “fixed” expenses.
- Figure out your variable expenses, or your “wants”, that should be using your funds after taking care of your fixed expenses.
- Plan for your short and long-term goals; keep in mind for important milestones that may come like retirement, or buying your first home.
- Your two, guaranteed savings, should go towards your emergency savings, and retirement
- Maintain your minimum 10% of your income going towards your long-term savings
- Utilize the banks systems to keep it as convenient and organized as possible, organization will keep the clutter out of your mind and let you focus on your day to day life
- Make sure to automate as much as you’re comfortable with, so you never miss a payment and never have to worry about if your money is in the right place
- Plan for something that makes you happy, so you can measure your goals in a way that make you feel fulfilled
- Review at least once per year, but do it more often as major changes happen in your life (like buying a house, getting married, losing your job, etc.)
Well that leads us to the end of article number 2. Hopefully these tips are able to help at least one person secure their finances, and make their lives easier. Like I always tell my clients, the key to a strong portfolio and a successful future is to have a strong building block. If you ever have any questions, comments or insight on my posts, feel free to email me directly at email@example.com, and follow me on twitter/ like me on Facebook!
I’ll be looking forward to my next set of articles on Investing coming this Tuesday!