Budgeting
Budgeting Principles

Think Big

Are you looking to become more financially responsible? Budgeting is one of the best steps you can take towards financial security and freedom. Making a budget (and sticking to it) can really pay off and help you reach your financial goals whether it’s paying off debt, saving for your dream home, planning for retirement, or simply reducing your expenses to live within your means. These budgeting principles and budgeting guide will help you value what’s important and help you gain better control of your finances.

First, let’s start with some basic budgeting principles to better understand what you can do to make your money work for you.

Budgeting Principles

Set Financial Goals for Your Budget

If you’re wanting to start a budget, you likely have some goals in mind and these goals will motivate you make better spending decisions. When you start budgeting it’s important to identify your financial goals – both short-term and long-term.

• Short Term Goals: paying off a debt (ie. credit card), reducing your monthly expenses to be able to save more, or starting to build an emergency fund. Generally, paying off debt should be your top priority.
• Long Term Goals: saving to buy a home or new car, paying off a mortgage, saving for your child’s education, or your retirement.

Take some time to identify some of your short-term and long-term financial goals. If you are making goals with your spouse or partner, first write them down individually and then compare the results once complete.

Budgeting Your Needs Vs. Wants

A governing principle of your budgeting decisions is determining which expenses are ‘needs’ and which ones are ‘wants’. A ‘need’ would be any basic human need such as housing, clothing, and food (that is groceries, not the drive-thru). A ‘want’ is something you like, but you can live without, such as that $5 coffee, entertainment, meals at restaurants, or a vacation. You absolutely need to make room in your budget for both, but if you were in a tight spot financially, your ‘wants’ would be the things you could give up to make ends meet.

Budgeting to Pay Off Debt

Being in debt is an overwhelming feeling, but with a little budgeting, discipline, and determination you can start to eliminate your debts! The sooner you pay them off, the sooner you can use your money for your ‘wants’ and save for the future. We recommend setting up your debt payments as automated transactions from your bank, this way you won’t be spending it on something else. Consider these two approaches to paying down debt to see which one works well for you.

1. Pay off the debt with the highest interest rate first (ie. credit card). This will save you a lot in extra interest and cost you less money overall. It’s important to pay more than the minimum payment if possible. If you’re still spending money on that credit card or credit line, the minimum payment doesn’t cover new charges. If you pay more than the minimum, it will help you decrease the amount you pay in interest overall, shorten your borrowing time and may improve your credit score for future borrowing.
2. Pay off the smallest debt first. All your debts are still accumulating interest, so if you get it out of the way, you’re no longer paying that interest and can put more money towards another debt. This approach will give you a sense of accomplishment sooner, which may actually motivate you to pay down larger debts. Once you’ve paid the smaller debt, put that money towards the next debt until it is eradicated. Use this system until all debts are paid.

I want it now!: Instant Gratification vs. Delayed Gratification

In our day and age, the concept of “delayed gratification” is foreign. “Layaway” has become a thing of the past and as credit cards have become so readily available – you can buy what you want, when you want and instantly feel happy with your purchase. But this perpetuates the cycle of debt. Imagine the feeling when you have waited and saved for your goal and can enjoy it stress-free without those monthly payments – that’s delayed gratification and it’s worth it.

On a long-term scale, if you’re willing to make sacrifices now, you may even be able to retire 3-5 years earlier! If you choose to purchase used vehicles instead of buying brand new, you can save yourself thousands of dollars that you can now put towards retirement. A shiny new car will depreciate the day you drive it off the lot, so why not let someone else take that hit and watch that extra money grow in investments instead?

Do you have an Emergency Fund in your Budget?

Your budget should include an emergency fund, which is money set aside to cover any unpredictable expenses that come up (ie: car or home repairs, unemployment, etc.). Eventually you should build your emergency fund to cover between 3-6 months of expenses, but if that seems unattainable, start with simply saving $1000. Keep it in an account that is easily accessible – for example a high interest savings account with a bank. Always remember it’s for genuine emergencies only!

Where Should I Keep My Money?: Chequing Vs. Savings

A Chequing Account is a transactional account – money is deposited, and you spend by withdrawing cash, using your debit card, or sending an e-transfer. Many banks will offer overdraft on a chequing account, but you should always keep a balance in your account of at least $500-$1000 in case of those unexpected transactions. Chequing accounts rarely have account fees, however, they do not offer any interest on your balance, which leads us to: a savings account!

A Savings Account is designed to hold your money for a longer period of time – such as an emergency fund, or short-term goals spanning about 3 years. The bank will pay interest on your balance. Returns won’t be as high as investing (see below), but you will have easier access to it in case of an emergency. Keep in mind that this type of account is not designed for frequent withdrawals and banks will often limit the number of transactions you can make.

Make Your Money Work for You with Investments

If you’re new to the budgeting world, chances are you’re newer to the world of savings and investments. We know money doesn’t grow on trees, but it can grow if you invest it! Typically, a regular bank savings account doesn’t offer a big return on your balance (even the high-interest savings accounts), so investing some of your savings is a great way to get your money to work for you. If one of your long-term goals is to save for a car, a home down payment, your child’s education, or even retirement, your future self will thank you for thinking ahead! There are a few types of savings accounts that can make you money through investments.

• TFSA (Tax-Free Savings Account) – allows you to set aside money in eligible investments and watch those savings grow tax-free. All interest, dividends and capital gains earned in a TFSA are tax-free and you can withdraw money from your account any time, for any reason also tax-free.
• RRSP (Registered Retirement Savings Plan) – allows you and your spouse/common-law partner to contribute. Deductible RRSP contributions can be used to reduce your tax.
• RESP (Registered Education Savings Plan) – a special savings account for parents who want to save for their child’s post-secondary education. The government will contribute a percentage towards the RESP through grants such as the Canada Education Savings Grant (CESG).
• Other investment possibilities exist in the form of mutual funds, stocks, bonds, equity shares, segregated funds, etc. While you can research and manage these yourself, they’re best managed by a financial advisor whose experience and training gives them better insight in the world of finance.

Speak to one of our financial advisors today to find out what type of savings account is right for your goals and they’ll work with you to invest it in the right places to get you a great return on your investment!

Protect your assets with Life Insurance

Will your family be financially okay if you were to pass away? This is where life insurance can be a benefit to your financial plan. Your workplace may offer insurance through a group plan, but you need to evaluate if it’s enough to cover your situation if you or your partner were to become disabled or pass away. The general rule of thumb is to have enough life insurance that covers 10 times your income if you have kids under 10 years old (5 times your income if kids are over 10 years old), PLUS the amount required to pay off your debt. A trusted life insurance broker at BIG will be able to advise what coverage is good for your situation and provide you with a quote.

Making a Budget

Now that you have a better understanding of these basic budgeting principles and tools, let’s dive into making a budget! Follow along with this worksheet (link)

1. Determine your monthly income

• Start with listing ALL of your monthly income: employment, child support, income from investments or any other sources.
• If your income is irregular, budget using a lower monthly income.
• Make sure you are using your after-tax income amount.

2. Calculate your opening balance

• Tally money you currently have in your chequing account, cash, savings or investment accounts.

3. Go through your expenses (credit card statements, bank statements) to find fixed expenses, variable expenses

• Fixed Expenses – recurring expenses that are the same every month (ie. rent/mortgage payment, car payments, loans, banking fees, contributions to savings).
• Variable Expenses – expenses that change each month (ie. utility bills, groceries, and birthday gifts). You can use an estimated average of how much you think you’ll spend every month. Or consider how much you might spend annually and divide by 12 to get the monthly average amount.

4. Categorize your spending

• Use the categories in the template provided and add any others that suit your situation.
• Determine which categories are ‘needs’ and which ones are ‘wants.’
• Make a Miscellaneous Category – kid’s fundraiser, co-worker contribution to a cake/retirement gift, anniversary.

5. Calculate your “Bottom Line”

• Subtract your monthly expenses from your monthly income. This is your bottom line.
• If you have money left over, use this money towards your financial goals.
• If you’re coming up short, see where you can make some sacrifices (remember needs vs. wants).

Budgeting Tips & Maintaining Your Budget

Now that you’ve made a budget, the challenge is the follow it! This is where the rubber meets the road. We know it can be time consuming to record your transactions and subtract them from the correct category. For the first few months, it’s recommended to check your spending daily so that you can see where your money goes. After budgeting becomes more a part of your lifestyle, you can check your expenses weekly or monthly.

1. Track your spending

• Enter actual values of your bills and income for each month in each category in the “Actual” column.
• The “difference” column will show you where you are over budget or under budget.

2. Adjust your spending

• Are your expenses higher than your income? If so, you are living beyond your means and will need to make some changes. This is not about punishing or blaming yourself, but you owe it to yourself to be honest about how you’re spending so that you make your financial goals a reality.
• If, for example, you underestimated the amount you need for your groceries and you’ve already done all the coupon cutting, price matching and sales shopping possible, you may need to increase your grocery budget. Try to find where you have over budgeted in another category to compensate for these changes.
• Remember that ‘wants’ are the first thing to cut in order to afford the basic necessities.
• If you’re having a hard time cutting your spending on your debit or credit cards, consider using physical cash and an envelope system so that once the money is gone, you can’t spend more.

3. Prioritize your financial goals and be realistic

• Financial goals don’t just happen; you make them happen! Write down your top three financial goals and some action steps to get there. Here are a few tips to get you started:
  • Paying off debt should be your priority, especially ones with high interest rates.
  • Start to build an emergency fund for those unexpected circumstances.
  • After you’ve paid your debt and have a comfortable emergency fund, you are now free to use that money for other short-term and long-term goals.
  • Devise a plan of action and give yourself reasonable deadlines to achieve your goals. If you have a surplus at the end of the year, divide that extra cash flow strategically to meet your goal deadlines.
  • Be sure to re-evaluate your goals at major life changes (ie. marriage, family, home, injury/illness, divorce, etc.) and review it annually to adjust.

4. Be willing to consider bigger changes

• Not all bills are set in stone so shop around for cable/internet/insurance prices to save you money.
• Be open to making life changes to save money – downsizing, sell your car and take transit, move in with a roommate to save on rent.

5. Reward yourself!

• The whole point of budgeting is to find where you can save money to gain control of your finances and use it for what you want! We don’t want you to just survive, we want you to thrive in life. When you’re in a good financial position, it’s okay to splurge occasionally. Grab that $5 coffee, go on that weekend getaway, enjoy that fancy meal, or buy that home theatre you’ve been saving for. You can enjoy these pleasures all the more because you don’t have to worry about how it’s going to affect your budget.