The Vault
How to budget for life: Part 1
by Graham Barber

How to budget for life: Part 1

Knowing the ins and outs of setting up a personal budget is the first step to taking control of your finances and your future.

If you're reading this article you are probably interested in making some changes in the way you handle your finances. Developing a budget is one of the best ways to get started. Why? By understanding how much money you have, you are in a much better position to make informed decisions about where the money needs to go.

Think of a budget as a house's foundation. It is the base on which a strong financial plan is built. Without it, your entire financial structure can become unsteady.

Why a budget is so important

One of the main reasons you'll want to set up a budget is to reach your short term and long term financial goals. These goals cover major events in your life that you will want to take into account when developing a financial plan. Always had your eye on a house with a big backyard? Want to save for your children's postsecondary education? Looking forward to an early retirement? It's

doubtful that any of these things can happen if you go through life spending money indiscriminately, without a plan.

Budgeting is about looking at the big picture, deciding on where your priorities are and making a few short term changes, to reach your goals.

Manage wants and needs

The first step in developing a budget is understanding the difference between wants and needs. When you're grocery shopping, how often do your reach for a box of cookies or magazine at the counter even if they're not on your list?

Make am promise to yourself that the next time you're thinking of buying anything, ask yourself: Do I need this? Or, do I just want it? You'll be surprised how

often you'll out it back on the shelf and walk away. Besides, we all know what happens to most impulsive purchases. They end up collecting dust somewhere in the house after a few weeks.

Making small changes

It's amazing how often most of us visit an ATM, take out $60 a day and can't remember where the money went. Usually that's because we spend money on little things - a candy bar here, a coffee there. But these little expenses add up.

These are perfect purchases to start determining the difference between wants and needs. By forgetting that third or fourth cup of coffee, you could be saving yourself more than just caffeine jitters. Let's show you how;

2 cups of coffee day = $3 5 days per week = $15 50 weeks per year = $750

5 years = $3,750

Over five years, you could save yourself enough money to pay off credit card debt nor pay down your mortgage sooner. Of course, this money could grow significantly, if you decided to invest it.

The reality of budgeting

As you see from the coffee example, making small life changes to meet your budget does not have to be difficult. Discipline and planning for the future makes excellent partners. It's simply a matter of remembering why you're saving and not spending in the first place. Like everything else in life, moderation is the key.

Then there is also the issue of cash flow. It always feels good to know you have enough money on hand, but everyone experiences peaks and valleys in their cash floe. The important idea to keep in mind, however, is to make sure your cash floe is working for you.

For example, of you have paid off your car and suddenly have extra money on hand at the end of the month, save it, invest it or use it to pay down your debt. But do not roll it into your cash flow without considering your alternatives. Most people tend to spend the money they have, but if hat money is out of sight, it's out of mind and the extra money is now working for you.

How to develop a strong yet flexible budget

Before we start, please remember: Budgets are not about blame, shame or deprivation. You are simply increasing your consciousness of how you spend your money and developing a guideline so you can reach your financial goals. And of course self discipline is important.

Step one: Categorize your expenses and income

In this first step, you'll want to set up income and expense categories to track everything you make and everything you buy. These categories might include anything from mortgage payments to childcare or even eating out. Make sure the categories you write down or print out are detailed enough so they can give you adequate ideas about your spending habits.

Step two: Calculate your income

Go through your files and collect your pay stubs. Use these pay stubs to determine your monthly next pay, after taxes. If your pay changes from month to month, try to figure the average. Note: Don't include surprise funds in the equation. If you do not always get that bonus at the end of the month, don't include it. One sure way to damage a budget is to depend on money you might not have. Calculate any other income such as interest income, bonds, dividends, child support, alimony, pension, and cash from a secondary job.

Step three: Calculate your fixed expenses

Collect your bills for the last two months. The idea here is to understand what your fixed expenses are. Fixed expenses are the ones that happen regularly and are planned. There is also

one other advantage in knowing what you spend on utilities - you start to look at ways to save money in this area. After inspecting your bills, you may be amazed how much of your income goes into hydro, cable and telephone service.

If you have other large expenses that come out once a year, divide that number by twelve to calculate the monthly number. Don't forget you children's camp expenses, your gym fees. vet bills and medications.

Step four: Write it down

It's time to record what you spend. Some financial books tell you simply to estimate what you spend in each of the non fixed or variable categories each month and then you'll be on your way to a finished budget. Yet, we ask you to take a couple of months to write everything down for a reason: Most people severely underestimate how much money they actually spend on groceries or an evening out. Understanding the full picture is crucial to budgeting success.

Whether it's dinner and a movie, a new sweater, an unexpected car repair, or a gift for a relative or friend, collect the receipts and make it easy for yourself to determine all of your variable expenses.

For the next month or two, try not to change your spending patterns. Just buy what you normally do and record it in a book. After a couple of months, add these monthly expenses and calculate them.

What's the difference?

Now it's time to take a look at the results. Add your monthly income and record it on a worksheet. Add all of your expenses and record them too. Now look at the difference between the numbers to see how you are doing. If you've got surplus money, you can still find ways to make your money to work smarter. Set up a plan with your bank so that money is automatically taken from your account to

invest, for example, a Pre- Authorized Contribution or recurring transfer.

If you're spending more money than you have, it's time to take a good look at what you're spending and why.

Points to keep in mind

- Know your goals and plan for them

- Small changes can have big impacts over time

- Think twice about impulsive purchases

- Write it all down - categorize fixed versus variable expenses

Part 2 next week: How to budget for life

The proceeding information was provided by Graham Barber, Branch Manager of Scotiabank, Alcona Branch.

The Scotiabank, Alcona Branch, is located at 1161 Innisfil Beach Road, (705) 431-6116. The Vault is a weekly series of articles provided by Graham Barber with financial advice and suggestions.