Financial Friday #158: Time to get your Household Budget Under Control!

How to get your Household Budget Under Control

Household budgets are under siege across Canada as inflation spikes prices on gas, food, and almost everything else we need to record levels. In addition, rising interest rates have already added, or could soon add hundreds of dollars to your mortgage payment depending on your renewal date and type of mortgage. Canadians have been forced to cut back on their monthly spend to try and make ends meet, but many don’t know how or where to get started.

The word “budget” has a reputation for being difficult to sustain and it isn’t undeserved, almost everyone has tried and failed at budgeting at least once. There are a lot of reasons for this. For example, your budgeted amounts may have been too strict and not realistic, or maybe it was simply because tracking expenses took too much of your time?

A lot of people start the budgeting process with trying to figure out how much they think they spend or might need and then try to live within those amounts. The fact is most people don’t really know (or vastly underestimate) how much they spend. So, the first step to creating a realistic, sustainable-over-the-long-term budget is to track your current spending. You could do with this with latest mobile budgeting app, a google spreadsheet, or a piece of paper, all will work fine. It doesn’t matter which method you choose, just make sure it is quick and easy so you can keep on top of it and don't forget!

Once you start tracking expenses you will soon see some that a whole pile of them are quite stable and don’t vary much (if at all) from month-to-month. This list includes the mortgage or rent, car or student loan payments, most utilities (some like gas or electric do vary seasonally), car or life insurance, and childcare. A second class of expenses are necessary items that fluctuate a little from month-to-month, like food, gasoline, and (essential) clothing.

The third category of expenses are discretionary or nice-to-haves.... but you could survive without. These include eating out, vacations, concerts or sports events, recreation, and non-essential clothing.

You can determine your basic monthly spend by adding up all the items in the first two expense categories. Put that amount of money into a chequing account every month and pay all those bills from that account. You don’t have to bucket each purchase to a category if you don't want to, but if you are running short from month-to-month and you are not cheating and using that money for non-essentials, you may have to up the amount. It’s ok to use a credit card instead of cash, but you must pay the charges right away. “Forgotten” credit card purchases are one of the main reasons for budget fails.

Any money leftover after filling your basic expense bucket is not what you can spend, because you haven't saved anything yet! You need to fill two more buckets — your savings bucket and your discretionary or fun-money bucket. This is where it all goes sideways for most people. Taking from one bucket obviously robs from the other, so you need to find a balance between short-term gratification and long-term financial security. You also need to stick to the plan and lock away these amounts every month to succeed.

It isn't reasonable to follow some guideline that says put away "xx" percentage of your discretionary income because saving 30% of $500 is a lot harder than saving 30% of $5000. You are going to have to come to a conclusion yourself on what is livable when choosing between what you save and what you spend and aligning that to other financial goals like funding your retirement. Our only advice is that even if what you can save at the moment seems negligible, make that commitment! Did you know that just $100 month invested at 5% for a period of 30 years will give you an extra $100K for your retirement?

If you are running out of money just trying to cover the basics, you need to go back and dig into your spending on necessities. There are some low hanging fruits here…. cable packages and cell phone plans are much easier to cut than the water bill, and food is a huge expense that offers a ton of savings opportunities.

If you are seriously in the red each month before even getting to your discretionary spend, then you need to dig into your fixed expenses. Number one on the hit list and a primary source of overspending is the car. Ideally, you want to keep the car payment and the related expenses (gas, insurance, oil changes, tires parking, etc.) to around 15% of your take home. Most people can afford much less car than they currently drive and turn to the never-ending lease or monthly payment to make it happen.

Another option for some families is to go from two cars to one. Before you say impossible; at least look at how you might make it work and how much money you could save.

If you are having trouble making ends meet and up until now have been getting by with fairly loose monitoring of your spending, it is time to dig in and put some controls in place. You don’t need a complicated spreadsheet (unless that works for you!) but you do need to know where your money is going before you can figure out a savings plan.


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