Scott Schaefer, CA CIRP
Some of the most popular resolutions each year are to “Budget” or to “Save Money”. The two of these go hand in hand, unless you make a lot more than your expenses, in which case, saving money could be easier. For the rest of us, we need to understand all of our cash outflows, in order to know how much we are able to save.
Budget – in simple terms, is a projection of future income and expenses. The concept is simple, but the execution is hard. Individuals, businesses, and government all struggle with enforcing realistic budgets and sticking to them. In order to be effective with budgeting, you need to be ready for a lot of hard work and accountability. Below are my top 6 tips to help you with your budget:
1. Understand your income: In my opinion, the most important item. Know exactly how much you bring home every month. This is the biggest constraint we have. Always think about your income after taxes as that amount is all that you have available to spend. If your income varies, you need to know the lows and the highs. In order to set a realistic budget, you need to be realistic with your income or the bottom line is not going to work.
2. Review your expenses from the last 12 months: This is a lot of work – I am not going to deny that. You need to review all your expenses from last year to understand where and how you spend your money. Get copies of all your bank statements and look at each transaction to get an understanding of where and how you were spending your money. Once you have reviewed all of your past spending, group the items into categories, such as shelter, vehicle, food, personal items, children costs, etc. Make your groups make sense for you.
3. Plan out your expenses in advance: Once you have reviewed last year’s expenses, you now can project forward the next 12 months of expenses. It is important to look at expenses on a monthly basis due to possible monthly or seasonal swings. Expenses change when looking at consecutive months but remain relatively consistent looking at the same month year over year. For examples, birthdays happen the same month every year, increased child care costs occur in the summer months, etc.
4. Understand your NEEDS versus WANTS: In order to stay on track and not overspend, you must ensure all the NEEDS are paid first. See my prior blog posting on Needs versus Wants concept.
5. Time all your bill payments with your pay cheques: Make life easier by matching the cash inflows with the cash outflows. Doug Hoyes explains this concept in his video at this link.
6. Reduce your debt load: Interest payments can eat up a serious portion of your monthly income. Eliminating debt allows you to have more available cash so that you can budget more effectively and start to save money for yourself.
Budgeting and cash projection is challenging, but very rewarding once you have mastered it. There are many principles and ideas out there – learn from them and adapt them to your situation. No two cases are ever the same; therefore you must find what works for you. More budgeting tips including video feeds can be found on hoyes.com.
If after you have done your budget and cash flow projections and you are losing money each month, then something needs to change. Look at the interest and debt serving costs – is this amount putting you in the negative each month? If so, then now is the time to restructure your debts. Consider what option will work for you. Some options include selling assets, refinancing with the bank, or a more formal plan such as a debt management plan, consumer proposal or personal bankruptcy.
Posted on January 5th 2012
