Friday, 21 October 2011

Budgeting For Beginners by Scott Keenan

You mean you’re supposed to pay for things BEFORE you get them?

TV has lead me to believe that it is my duty as a young person to party every weekend, wear couture and take trips to tropical locations on a regular basis. The only thing getting in my way is my bank account.

I have a hard time believing most people my age are able to afford all of the things that they do. I’m often flipping through my Facebook account only to see many of them with jobs that pay much the same as mine are off in tropical locations, impeccably dressed, purchasing new homes and filling them with big screen TV’s and other assorted gadgets. The truth is most of them can’t. Welcome to the age of entitlement, where working hard (or not) means you deserve a nice trip or something nice for yourself regardless of your ability to pay for it

I’m not singling anyone out here. When I’m on vacation, I tend to deserve everything and I worry about the cost of it when I get back home. I’m also not singling out young people. It’s easier to refer to them, because I know they probably aren’t making enough money right out of University to live in a $200,000 home with a full entertainment system, brand new vehicle, bedroom set, and every unnecessary attachment that has ever been created for an iphone (including the circular saw).  I definitely know a lot of older people who go severely into debt at Christmas and have barely paid it off by the following Christmas.

Most of your problems can be solved by being a little thrifty for a few months, and being realistic about what you can afford. Other problems can be solved by going back in time and wearing some form of contraception. Also, winning the lottery wouldn’t hurt.

Step 1: Find Out How Much Money You Make.
Let’s pretend your salary is $40,000 per year. That’s not how much you’re worth. Check your pay stub. You make significantly less than that. If your bi-weekly paycheque grosses $1,500, you make about $1,200. Thus, your monthly budget should be for someone who makes $2,400/month not $3,000. Depressed yet?

Step 2: Determine Your Current Expenses.
Look back through your bank accounts and your credit statements. Add up your monthly expenses and find out how much you actually spent last month (or the average of your monthly expenditures over the past three months). Separate these expenses into needs and wants. Make sure you get them all. Try using budgeting software that links up to your bank accounts so you catch all the expenses. Sometimes you don’t actually realize you’re spending money on certain things (like all of your bank fees).

Writing down all your expenses really hurts your self-esteem. You realize how incredibly stupid you are with your own money. A couple coffees per day doesn’t seem like a lot, but a 2$ coffee twice a day works out to 120$ per month. A nice coffee maker would pay for itself pretty quickly. Now think about how many times a week you go out for lunch, and how much that adds up to.

Note: Don’t be too ambitious to cut things if you’re not actually committed to cutting them.

For example: Deciding to spend less on beer is only good if you do it. If you plan to spend less, and then you end up going over-budget you just screw yourself over.

Step 3: Talk to an Adult
You’re supposed to be saving 10% of your income and using 10% to pay off debt. These percentages could be higher, depending on you. This is the part where I will digress and tell you to speak to a Financial Planner. You need someone to look at your current situation and determine what is best for you. Also, you need to find one who’s not a complete moron. All of them will encourage you to buy some kind of insurance. It’s how they make their money. You should have a little insurance as long as you can afford it, just in case something happens. You’ll know how much of an idiot they are by the number of questions they ask you.

Terrible Financial Planner: After coming into some money I went to a planner at my bank and told him I was looking to put it into an RRSP to save it for a down payment on a house. He said that is a good idea…end of discussion. He didn’t ask me what I did for a living or how much money I made or even open my account to look at it. At the time, I was working for the government and I knew that if I planned on staying there long term, there was no reason to put money into an RRSP because when I went to draw my pension, my RRSP would actually result in me paying more in taxes.

Good Financial Planner: I went to a much better Financial Planner with the same question. She went through my bank account and asked me about every expenditure I made. After I showed her my budget, she challenged me to save the extra 300$/month I said was leftover in a separate account. She also had a mortgage broker in the office speak with both of us to give me a better idea of how much I should be looking to spend on a down payment, and a mortgage. Her distrust in my ability to identify how much money I actually spent, coupled with the anal retentive attention to detail when going through my bank account made me much more comfortable with her recommendations.

Step 4 Create Savings Accounts for Big Items
Most banks now have some sort of e-savings account, where you can have as many as you want for free. These are useful to keep your savings separate. Personally, I have separate accounts for gifts (including Christmas), toys for myself (including clothes and a new phone that doesn’t suck when my current contract runs out next year) and a TFSA for travel. I put 50$ per paycheque into gifts and toys, $25 into the travel account and 25$ into RRSP’s. This way when I have to buy gifts or decide to get something for myself, it doesn’t affect my monthly budget.

Obviously, you can’t go anywhere nice saving just 25$/pay. If you’re being paid bi-weekly, there are two months out of the year where you get three paycheques for the month. If you stick to your monthly budget, these cheques are just additional cash to drop into any one of your additional savings accounts. A couple 1,200 cheques in your travel account make for a nice vacationJ. (Grammatically speaking… does the period go before or after the smiley face?)

Step 5 Credit Cards Are Your Friend….Unless They’re Not.
Most financial planners will encourage you to use cash. That’s because by the time most people go see a Financial Planner, they’re already in trouble. Credit Cards can be your friend if you can use them properly. Get something that has points or air miles and go nuts. If you can use your card for all of your expenditures, stick to your budget, and pay it all off at the end of the week, the card is your friend. It’s like getting paid to spend money! You do have to have some self-control to do this.  For some people, the idea that you don’t actually need the money in your account to purchase something drives them crazy and they end up buying ridiculous things like sweaters for their pets.  If you can’t pay the card off at the end of the week, you’re not using it right. You should cut it up immediately, cancel it and stick to jars with your monthly budget in cash.
If you get really into it, like I did, you’ll find creative ways to decrease spending and increase your points.

For example: I used to buy the office lottery tickets every week. I would collect everyone’s money and purchase the tickets with my credit card. I got points for using the card, and didn’t have to use one of my transactions to withdraw cash for the week, because I kept theirs. I also offered to pick things up for friends like movie tickets or snacks and had them pay me cash in return. This is convenient for them, and I get points for doing it….did someone say win-win? It certainly makes you less bitter about the fact that your dentist doesn’t do direct billing.

Step 6 Get Married
Marry someone rich or who at least makes as much money as you. Simple math would agree that paying rent or a mortgage is easier with two people than with one. Also, if you have a super cheap wedding, people will still buy you presents and give you money… Think about it.

A lot of people don’t budget, and end up overspending on things they don’t really need. They also fear that the budget will impede on their ability to do things that cost money. It actually does the opposite. Once you’ve put together a realistic budget, you realise how much money you were wasting before, and how much more you can do with your savings. It also relieves a lot of stress when it comes time to pay bills. If you stick to your budget you never have to worry about being able to afford your rent at the end of the month, or going into debt buying gifts for the seven weddings you went to this summer. You also get to splurge on yourself once in a while and get something new completely guilt free. 

Side Note: Rich people stay rich because they stick to their budgets.


  1. Such a smart man Scott! Wise beyond your years! - j

  2. Thanks this Julie my Financial Planner?