It’s probably fair to say that two of the most common resolutions people make are either to get in better physical shape or better financial shape (maybe both?).
It’s also probably fair to say that like most health clubs and gyms, which are usually full in January and empty in February, our best intentions on the financial side don’t always last as long as we’d hope.
So, how can you look towards a better financial future in a way that will actually work?
Let’s look at a few simple ideas.
Start with Determining Your Resources
In our office, I meet with clients and help them learn their options to deal with debts, and Melanie meets with them for financial counselling once we’ve identified the option that suits them best.
We both find a similar thread with a lot of folks we see – a lack of understanding about how much income they actually have in their household. Certainly, most people know what their hourly wage is, or their salary, or some components of their pension, but many people struggle to identify how much their average monthly take home, after tax, net in their pockets income is.
So, step one in getting on top of things is a bit of a simple inventory: how much do I have to work with?
If your income tends to fluctuate, see if you can determine a ‘low average’ – don’t take your best weeks pay. We need to try not to count on too much overtime, for example.
Once you have determined how much you are working with, you can start to make better decisions about where it should go.
Build a Plan You Can Live With
Budgeting can feel boring and sometimes stressful. However, you need to have some type of plan so that you can get more out of your money.
There’s lots of advice out there as to how to budget, but we’d argue most of it is flawed. Envelopes or jars can work, but often the amounts in them get jumbled, and frankly, how much cash do you really want sitting out?
The Hoyes Michalos No-Budget Budget Approach:
Budgeting by calendar, in our opinion (ie, paycheck to paycheck) runs the risk of just ensuring you are broke every two weeks. And most budget pages that you can download and fill in have too many categories. We think the reason most people don’t follow through on budgeting is that the budget they build is built to fail.
So, what’s our great idea then?
Now that you have an idea of your resources, the next step is to understand how you spend money.
Do you realize (we’re guessing you do) that most of your money is already spent? Here’s a mistake we want to move past – don’t worry about wants versus needs right now. Right now, we need to look at FIXED versus VARIABLE expenses.
Any expense can change over time, but for right now, some are fixed. On this list go the obvious things like rent, car insurance and hydro. But also on this list go things like gym memberships, Netflix and bank charges. To be clear, we understand that groceries are more important than Netflix, but this is about fixed costs, not needs.
So, make the list: what are your fixed costs for the next month?
Now, subtract that total from the income you expect to have.
That’s your budget.
Here’s how you actually use this budget: take whatever is left over and divide by 4.
You have about 4 weeks to live on the leftover. You need gas and groceries. You may need medicine, clothing, etc. Maybe you’d like to grab a coffee before work everyday. Go for it, if you have money left over. If not, make the coffee at home.
What we know for certain is that if you spend more than the left over amount, you are going into debt or paying your bills late. What we also know is that if that amount, the leftover, is larger than you expected, you are wasting money. If the number is smaller than what you need, then your fixed costs are too high or your income is too low (no disrespect intended here, we recognize a large segment of the population does not have enough to make ends meet).
How Does This Help Me?
Now you can help yourself. You know what is coming in and you know what your fixed costs are and where that leaves you.
The next step is to ask yourself, am I happy with this? If you are, stop reading and congratulations!
If not, then start planning to improve your situation. Here's how to do that:
Set Some Savings Goals
Now you want to take the next step, which is determining what you want out of your money. The biggest motivation to continue working at your budget will be accomplishing a goal with your money.
It's often much easier to get ahead if you budget your savings, rather than you spending. Working towards something positive, like saving for your next card or putting money in an RRSP, can be a positive motivator. It's much easier to keep up than feeling you are giving up on something if your goal is to cut back on spending.
We don’t want to set your goals for you, and whether they are long-term and conservative like saving for retirement or short-term and fun like going on a vacation, if they are important to you, they are important to us and worth pursuing.
Previously we talked about fixed vs variable spending. What we’re going to suggest now is make a short list of one to three goals (the less the better, one thing at a time if possible), and make saving for it a fixed cost. Literally add into your fixed expense list an amount for ‘goal’. If you need to start at $10 per month, do it. If you can do more, do more. Take that money and set it aside, in a separate Tax Free Savings Account (TFSA), for example.
Focusing on a savings goal doesn't mean we don't want you to keep a careful eye on your spending. Is there anything in the ‘fixed cost’ list that could be eliminated or reduced? Is there a chance you could live on a bit less of the ‘leftovers’ and put more away for that goal?
The key to getting on top of your finances may very well be to understand them a bit better. Not by spending hours setting budgets that won’t get used, just by learning where your money goes and asking yourself constantly "am I happy with this or could I do better?"
What About Debt?
Good question. In our line of work, we help clients solve their debt problems every day. A spending plan is helpful if debts are fully under control, but if your debts are eating up all your income through interest charges or minimum payments, you need more than just a budget.
If this is you, come and see us, so that we can help you find the best option to eliminate your debt and help you build a spending plan within that option that can help you stay on top of your finances from now on.