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Your finances: crystal clear or a little hazy?

November 29, 2013 by Editor, InvestingForMe

Most of us attempt a budget exercise when we’re feeling a financial crunch and decide it’s time to get serious about where all our money is going. Sound familiar? Then again there are some people who do sit down and formally account for every penny they’ve got coming in and going out. If you happen to be one of these lucky people, then reading our recent articles will just help to reinforce your efforts and give you the confidence to know you’re on the right track.



If, on the other hand, your financial reality is a little hazier as it is for most Canadians (i.e. living pay cheque to pay cheque, hoping you still have a few dollars left after paying your main bills, etc.), then maybe it’s time you did a financial reality check in the form of a real budget. Going through a formalized, detailed budgeting exercise can actually bring clarity to your financial reality and help you see better to make better financial decisions.

It’s tough when my friends and neighbours keep buying stuff I can’t afford!

We’ve all had these thoughts. Why can’t we get another big screen TV? Why can’t we drive a swanky new SUV like everyone else?

The cruel reality is that you only have so much money to spend. (Sure, maybe a bit more if you’re ok with borrowing from others to no good end!) But if you really want to get ahead financially, you’ll have to learn to say No more times than you might like. And even though saying No may make you feel poor and full of self-pity, I have news for you. Saying No to the stuff you can’t afford just makes you normal!

Real budgets let you see clearly how to get to the finish line

Building a budget does more than just help you identify your financial priorities and add clarity to your spending decisions. It also gives you a good reason for saying No!

For example, when you get asked to join your friends for an expensive night out on the town, which of the following answers would you rather say?

  • Thanks for inviting me but I can’t afford it. I’m on a budget.


  • Thanks for inviting me, but I’m saving for … (fill in the blank … an extra mortgage payment or RRSP, RESP, TFSA contribution, trip to Mexico, new car, etc.) this year and I’m almost there!

That first response sounds pathetic and embarrassing, doesn’t it, and just invites sympathy. The second answer, on the other hand, sends the opposite clear resounding message that hey, I’ve got my financial house and priorities in order! And it invites respect and probably even a little envy.

Making a real budget: the devil is in the details

Every budget should contain two basic parts:

  • It must include one part with detailed information about your family’s income and individual expenses, and
  • It should also track those income and expenses items over a period of years so you can easily see the things that are costing you and your family unnecessarily.

The income and expense sections should itemize all the sources of income for you and your family and where that income is spent. The details are important, that is, every penny of income is important and every penny of expense is critical. So that means taking the time to dig up the paperwork to get your real numbers (i.e. property taxes, hydro, cell phone, Internet and your credit cards, etc.). The budget is only as useful as the detailed information it contains. If you simply guess or estimate your numbers, you’re just playing and basically deluding yourself into a false financial reality, and your financial decisions will most likely just get you repeatedly into financial hot water.

That second part of your budget should track your income and expenses over a period of years so that you can effectively identify areas of rising expenses (like that $100 a month cable/Internet package you signed up for two years ago that now costs $165!). By tracking individual expenses year after year, you can quickly identify those items that get too expensive and need to be reviewed. (You know, that gym membership that never gets used or that boat that never leaves the marina!)

Back-of-a-napkin budgets

Avoid short cuts when working through the budgeting exercise. It’ll only lead to a frustrating false positive. For example, here’s what a quick and easy back-of-napkin budget looks like:

Sources of Income:Annual 
Salary $65,000
Source of Expenses:  
Car Lease$5,028 
Income Taxes$11,428 
RRSP Contribution$2,830 
Car Insurance$1,200 
Car Maintenance$500 
House Insurance$375 
Property Taxes$2,100 
Cell Phone$1,200 
Strata Fees$3,600 
Total Expenses: $64,336
Surplus $664

So according to this kind of budget, it looks like this guy is actually doing all right! Looks like he’s spending less than he makes, right?

Unfortunately, he’s made a couple of common mistakes in his napkin math:

  • He has confused his gross income with his take home pay. He forgot to deduct CPP ($2,356.20) and EI ($891.12) premiums from his gross income of $65,000. So, in fact his 10-minute budget exercise is wrong. He’s actually overspending by $2,583.32.
  • He’s also neglected to list all of his expenses (dining out, beer, wine, clothing, club memberships, etc.), and so he’s thereby created a useless budgeting fiction. He’s actually not as rich as he thinks.

Where to start: finding a proper budgeting spreadsheet

Before you begin a real budgeting exercise, find a budgeting spreadsheet that is savable, either from an online website or by downloading a spreadsheet to your computer. If you’re comfortable working with excel spreadsheets you can create your own personal budgeting template.

For example, InvestingForMe’s Comprehensive Household Budget tool is easy to use, savable online in a secure, personal Folder, and is completely free. This online tool itemizes all the income and expense section making budgeting easier so you can return to it repeatedly to gain financial clarity as you’re forced to make ongoing financial decisions including those decisions to say No!

Once you’ve actually got a place to start itemizing a real budget, then it’s time to sit down and get a real snapshot. Next week we’ll discuss the ground rules for creating a clear and accurate budget.


(This article was first published by Troy Media)


Read the next article in the series - Budgeting: time to look real close at what’s inside the piggy


Read the 1st article in the series -  76% of Canadians must be idiots when it comes to saving and planning for retirement!



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