Budgeting: time to look real close at what’s inside the piggy
December 2, 2013 by Editor, InvestingForMe
As we have discussed in our previous articles, budgeting is a team sport where you have to make sure everyone’s on board with how important it is and what the rewards will be for everyone if the team succeeds (pay off mortgage, trip to Whistler, new car, etc.). You want to win the cup – together!
Two parts: income and spending
The Household Budget is comprised of two main sections:
- Sources of Annual Income, and
- Sources of Expenses
And to make the job of sitting down to tackle filling out all this information easier, you first need to take the time to properly gather certain documents together that will provide you with the most recent income and expense information.
Note-to-self: Taking the time to hunt down all your financial papers so you can properly fill out a budget is probably half the battle of doing the budget!
Here’s what you’ll need for filling out each section of the budget:
Sources of Annual Income section:
- Your most recent Income Tax Return. Make sure it’s a complete return with copies of your income tax slips (T4, T5, T3, T4A, T4-RRIF, RRSP contribution receipts, etc.). Your income tax return and information slips will provide you with the majority of the information you need to complete this section to determine your income and income deductions (such as income tax paid, EI and CPP premiums deducted, pension contributions, dividend, interest and trust income, etc.).
Sources of Expenses section:
- Copies of the statements for your bank and investment accounts, credit cards, household utilities, property assessment notices, etc. so that you can list all the things you’ve been spending money on over the last months and see clearly where all your money is going and how much it’s really costing you. For some expense items you should have at least 6 months (preferably 12 months) of statements available. The account statements will help you to identify and, in some cases, get a handle on your annual expenses.
Next step: work your way line by line
Working your way through a proper budget line-by-line means itemizing or identifying all your income and living expenses, and yes, warning!, this exercise may bore you to tears! But think of the big picture. When you take the time to itemize all your income and living expenses, and then take more time to look at each item with a magnifying glass, all that time and effort will actually pay off. The team will achieve its financial goals and get closer to that dream vacation, etc.
Remember, budgeting is a tool that helps you get the maximum benefit from your spending. You work hard for your money, so make sure you’re making the most efficient and profitable spending decisions.
So when going through the budgeting exercise, your team should focus on three main goals:
- Increase the amount you can save on a regular and consistent basis.
- Make sure you receive the maximized benefit from each spending decision.
- Identify your spending priorities in relation to your financial and lifestyle goals.
Time for the magnifying glass
For each expense listed in your budget, you should ask yourself the following questions:
- Is this expense item a need or a want?
- If it’s a need, are you getting the best value for the money you are spending? Make sure you‘re not over-paying for the item. A budget helps you to question and examine the cost and benefit of each expense.
- If the expense item is a want, ask yourself if it’s important to your lifestyle. If it’s not, then it cut it. But if it is important, then again check if you’re paying too much for the item. You may have committed to the item expense years ago not realizing that you can pay less for the same item today (i.e. internet, cable, cell phone services, etc.). Compare costs with your neighbours or friends, and then call up the provider armed with the knowledge of other people’s costs. Sometimes it’s as simple as asking the item’s provider to give you a better price or maybe a competing provider can lower your costs.
Note: As you question each expense item, if you’re happy with the answers to these 3 questions above, then consider yourself good to go to scrutinizing the next item. If you don’t like the answer for an item, then you’ve got yourself a red flag to take action – i.e. either eliminate the expense completely or shop around for a new provider at a lower cost.
Remember: Unsatisfactory answers are your opportunities to save money!
Next week we’ll look at a couple of ways your budget can help you save and even increase your wealth.
(This article was first published by Troy Media)
Read the next article in the series - Building wealth: reduced spending and income growth – the perfect one-two combo!
Read the 1st article in the series - 76% of Canadians must be idiots when it comes to saving and planning for retirement!