Budget Process: Focus on Expenses to Create Savings
The main goals for your budgeting should be to maximize the benefits you receive from each dollar you spend and to eliminate those expenses that are not a need or do not support your current lifestyle. Ultimately, you want to complete the budget process confident that you are using your financial resources wisely.
We are confident if you complete a formal household budget and use it to review your adhoc spending decisions, you will uncover financial savings you never realized existed. Increasing the efficiency of your spending will lead to an increase in the money you have available for your financial priorities, whether they be reducing your debt, increasing your savings and investments, or covering the costs of high priority items like a child’s education, purchasing a replacement vehicle, or an badly needed new roof. Increasing the money available for debt repayment or investing for future goals will result in a dramatic increase in your net worth value.
Example: Below is a simple table that summarizes the long-term potential from small increases in your monthly savings. Take a moment to study the table.
|Monthly Savings||Annual Savings||10-year Savings @5%||20-year Savings @5%||30-year Savings @5%||40-year Savings @5%|
While at first glance this looks like a mumble-jumble of numbers, if you look carefully there are two important details to note about the table above:
- The table assumes that you not only have the discipline to change your spending habits and, thus, increase your monthly savings, it also assumes you have the discipline to hold onto those savings for future use or use them to pay down your debt. Reducing your debt can offer you the same consistent long-term rates of return. For example, if you are paying a 5.0% interest rate on the debt, by paying that debt down you have effectively paid yourself a 5.0% rate of return. In addition, if the interest charged is not tax deductible, the interest charge is paid with after-tax income, so by paying down the debt your realized rate of return is actually greater than 5.0%.
- The table assumes that you accept an investment rate of return that is a conservative and consistent annual rate of return. The table assumes that you will have the patience to grow rich slowly. (There is nothing worse than working hard to save a dollar only to invest it and have your investments turn that same dollar into fifty cents!)
Remember: When you really focus on your expenses you can create additional savings and by paying down your debt and adding to your investments you have increased your net worth and moved one step closer to achieving your financial goals.
Even if you are able to increase your savings by $50.00 a month, the budgeting exercise has been a success. Don’t be afraid to change service providers if an expense begins to increase without a corresponding increase in the benefits you receive. Remember the vendor works for you, not the reverse. If you notice a particular expense is rising, then make a call to the vendor and ask why and how can they reduce your costs? You may be surprised in their response. Every dollar that you are able to hang on to will help you toward achieving your financial goals.
Your household budget should be updated and reviewed at least twice a year to ensure that your expenses remain in line with the product and service benefits you are receiving. Some people choose to do their budget reviews in December and June and some prefer March and September. Select times that are convenient to your lifestyle.
Remember: Your household budget is the backbone for establishing realistic financial goals like saving for your retirement, helping to pay for a dependant’s education, saving to purchase a family cottage, taking that big vacation, or being able to quite your job and pursue your passions. The Household Budget is a practical and powerful financial tool.
Make it fun
If you can, try and make budgeting a team sport or a game. Team up with your spouse, best friend or a group of friends and use the team’s resources to research spending options, promotional savings offered by different service/product vendors and share ideas and experiences to help each member of the team use their financial resources more wisely.
You have probably heard about investment clubs, why not form a budget club? Set regular meetings to discuss the savings you have discovered on your own and those of others in the club. Use members as a resource for money saving ideas.
Note: Budgeting can be very successful and satisfying if you approach it with the right attitude and frame of mind.