BUDGET - INDEPENDENT
Meet Kathy, Donavan, and Tom
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Kathy, Donavan, and Tom need your help. Follow them along on a financial journey, as they make mistakes, fix them, and learn their lesson.
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Click-through time: ~6 minutes.
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Test your knowledge with a quiz and our game: "Talk Like a Banker"!
"Kathy, Donavan, and Tom are zombie hunters working full-time for the government..."
Step 1:
How much do you make each month?
If you get paid regularly, figure out how much you earn each month. Monthly makes sense (even if you're paid bi-weekly) because most of your big expenses, like rent, are monthly.
If you get paid irregularly, add up all your irregular income from the past year and divide the sum by 12 months. That’s your monthly ‘paycheque’.
Make sure you’re working with after-tax amounts.
Budgeting Tip #1
Check with your bank if they have a budgeting app that does this for you - sometimes they do.
Step 2:
Where does your money go?
Track down how much you’re spending every month on necessities (food, shelter, transportation, insurance, and whatever you consider ‘a must’) and on fun things.
If you're not sure how much you're spending, look at your transaction history for the previous year (for your chequing account and credit card) and group your purchases into 'must' and 'fun' spend.
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But this method won’t work as well if you tend to use a lot of physical cash - it's harder to remember where you spent the money.
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So for the next month, look closely at your expenses - keep track of every cash purchase you make and its value (hold onto / take pictures of receipts)
Step 3:
The 50/20/30 Rule of Budgeting
Of your after-tax income, you should spend approximately:
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50% on your necessities - 'must' spend
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30% on 'fun' things
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20% on your financial goals (savings / investments, debt payments)
Having said that, it's your budget. Your must/fun-spends may differ from someone else's.
If you live in an expensive city, a 70/15/15 rule is more realistic (mostly due to increased rent / housing costs).
There may be periods in your life when you aren't saving at all (student / unemployed). That's fine in the short-term, but not sustainable - everyone needs to save for their future. Put aside whatever you can manage.
When you're a student, it's okay to treat your student debt money as income in your budget. In all other circumstances, debt is not income.
Budgeting Tip #2
There are free / payed third-party budgeting apps. They connect to your accounts and cards to help you track your spending alongside your budget. To use them, you'll have to provide your banking information. This may be a violation of the banking agreement you signed when you opened your account / card (not to share passwords). It may also be a risk to share your personal financial data with anyone.
Step 4:
Now do it
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As soon as you get a paycheque, put aside the portion you earmarked for your financial goals (savings / investments, debt payments) .
First, make debt payments. Then, transfer what's left to your savings / investment accounts.
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The rest stays in your chequing account - it's for short-term ongoing expenses during the month.
At the start of month in which you're planning to make a larger purchase for which you have saved money, transfer the money needed from your savings / investment accounts to your chequing account.
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If you've been budgeting well and are spending less than expected, you may have some extra cash in your chequing account at the end of each month. Great work. When you feel there's too much idle cash, transfer it to your savings / investment accounts.
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Monitor your expenses to avoid running out of money. Every month, check how you did relative to your planned budget: download your chequing and credit transactions, collect your receipts, and group them into ‘must’ and 'fun' spend categories.
Troubleshooting
If your expenses and financial goals exceed your income, consider working extra hours, picking up a part-time job, or cutting down on non-essential expenses.
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Focus on paying the biggest items in your "must" spend first, like rent – you can move somewhere more cost-effective or take on a roommate.
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Cut from your "fun" spending - don't remove everything as you'll likely become more miserable than before.
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Consider buying groceries/household/personal items in bulk or at discount stores. Buy private labels instead of brand names and take advantage when things are in season or on sale. Cooking is cheaper than take-out. Meat protein is more expensive than plant-based, and alcohol / recreational drugs can make a sizable dent in any budget.
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Transportation: Owning a car is more expensive than using public transportation and Uber.
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Consider paying for small items with cash, rather than debit or credit card - many people find that it's harder to spend cash than plastic.