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Financial Friday #103: Keeping a Lid on Expenses
Budgeting Advice You've Already Heard — Listen This Time!
Budgets can be complicated and time-consuming, and that's why most people fail at using one for any length of time.
Congratulations if you have found a budgeting app that works for you, just remember that the only goal is to spend less and save/invest more for the future —whether you spent $11 last month on donuts or a six-pack is not the issue.
The simplest budgeting advice we have all heard a million times is to "pay yourself first" by regularly diverting a portion of your salary straight into savings. You can invest the money later, just make sure the money goes into your savings account like clockwork.
How much you save every payday isn’t what some finance guru or article tells you, it’s the amount you determine after analyzing your “fixed” expenses. There are a number of items that you have to pay every month: rent or the mortgage, utilities, loan payments (car, student loan, credit card, line of credit) and food. Add up this cost and see how much of your take-home pay it eats up. Whatever is leftover is what you have to play with — you can save it, use it to pay back debt, or spend it on beer and donuts!
Let say you your fixed expenses consume 75% of your take home pay. You may be able to put 10% into savings (investments) and use the other 15% to spend any way you want. That 15% includes things from clothing to going to a restaurant to getting a haircut, because they all go into one bucket.
It’s complicated to split them out and would only be useful if a.) you like doing it, or b.) you want to know which discretionary items are eating up your cash (a good thing to know!). The key is to dial in your fixed and discretionary spend (it may take a few months) and then stick to those numbers.
If you find your fixed expenses eat up more than 75% of your paycheque, then you need to look at bigger changes. Spending less on housing may be possible, but it will depend on your local housing market and your current home. If you overspent on your house, you have a lot more options than someone living at the lower end of the rental market.
Debt can also spike you fixed costs. If you carry an $8K balance on your credit card, the interest payments are racking up pretty good. You could try to pay off your card with lower cost debt (a home equity loan or balance transfer card) but what you really need to do is bite the bullet on discretionary spending and focus on paying down the balance as quickly as possible.
Cars are one area where many people can cut back, and make sure to look at all the operating costs and not just the payment. A shiny new $50,000 pickup financed at 4% that only goes 7 km on $2 worth of gasoline riding on tires that are $1400/set may not be the best option for getting to and from the grocery store.
Look at your food cost as well. Prices are rising every week and while we can’t do much about the cost of milk, prices of many big-ticket grocery items like meat or laundry detergent vary greatly from week-to-week and from store-to-store. Know the prices of your grocery items and always be flexible with your menu to take advantage of timely bargains or cheaper alternatives.
Managing the household finances with the price of everything going up (except your salary!) is becoming a nightmare for a lot of people. Not having any system to keep tabs on spending and put away a little each month is making it worse. Paying yourself first and not worrying about categorizing every little expense is a simple plan to get you started.
If you want to get a handle on your household spending, financial coach Alanna Abramsky will be offering a free webinar next week. It’s only an hour and it will set you up to get rolling with a simple system to better manage your expenses.
Correction to the March 11 Financial Friday newsletter:
What is said: "Paying the minimum 3% payment plus $100 on a $5K credit card debt will cut the time required to pay off the balance in half from 50 months down to 25 and save you $1200 in interest charges!"
What it should have said: "Paying the minimum 3% payment plus $100 on a $5K credit card debt will cut the time required to pay off the balance from 251 months down to 38 months and save you $4500 in interest charges!"
Where's the FIRE? The FIRE movement is an attempt to retire early without being ultra-wealthy by balancing a frugal existence throughout life against the benefits of not working.
Do you think it's a good time to buy a house? Social media is the Wild West of financial advice so do your homework, but PersonalFinanceCanada on reddit certainly has plenty of great topics and viewpoints — from seemingly educated and rational opinions to outright ranting.
Financial advice for my 20-year-old self An entertaining read with some good advice for anyone who has recently finished their post-secondary education indebted and battling it out in the job market or in the early days of their career.