Money burning holes in your pockets? Credit card balances giving you grief? Finding it near impossible to actually save? If you’re sick of your money disappearing and want to take control of it, create a monthly budget!
According to the Financial Post, “In the third quarter of 2015, household debt reached 171 per cent of disposable income. In other words, for every $100 of disposable income, households had debt obligations of $171.”
That means a significant amount of Canadians have way more money owing, than they do coming in. If that isn’t setting off major alarm bells right now, it should be!
It seems as though many people have become complacent with the word ‘debt’. But debt is serious. And it’s the very thing that keeps us from living beyond paycheque-to-paycheque (and retiring early!).
Give every dollar a job
The key to tackling debt and taking charge of your finances is giving your money a job before it comes in. This means every dollar you expect to receive for the month gets allocated to an expense or savings duty. Create a monthly budget and know where your money needs to go before it even comes.
Understanding exactly what you have coming in and out each month helps prevent your hard earned dollars from slipping through your fingers.
Here’s how to create a monthly budget:
1. Lock away your credit cards and download this Monthly Budget Template
If you’re serious about getting control of your finances and erasing your debt, your first step is to stop using your credit card today, and download the above monthly budget template.
2. Add your monthly earnings
In the top column, add earnings you’re expecting for the month ahead (from all sources: salary, investments, bonuses etc.).
3. Make a list of your current expenses
Everyone has regular bills that don’t change too much month-to-month. Go through past statements and write down how much you spend per month on average on:
- Rent or mortgage payments
- Household bills (gas, electricity, cable, internet)
- Living costs (groceries, household items)
- Financial products (RRSPs, insurance)
- Transportation (gas, public transport)
- Entertainment (dining out, vacations, theatre, gifts)
4. Enter expenses into your monthly budget
Add your expenses into your spreadsheet, in order from most important to least (i.e. mortgage payments/rent at the top, entertainment at the bottom). The red items are high priority – don’t skip them! Add extra line items as needed.
Here’s John Smith’s example:
5. What’s the difference?
By now the ‘difference’ line is telling you what’s left over.
If you’re in negative numbers, you’ve got to do some serious cutting back! What that negative number says is that whatever it is you’re spending your money on – you CAN’T afford it! Unless it’s an absolute emergency, don’t even think about putting it on your credit card because you’ll be literally paying your bank (in interest) to keep you in debt.
If after all your expenses you do have money left over, HIGH FIVE to you! Before you start eyeing off a shiny new TV, send it to your savings account for a rainy day. Out of sight, out of mind! That chunk of change – no matter how big or small will get you to your financial goals faster.
6. Cut back
You could start saving money TODAY if you cut the excess fat. So go back through your numbers and see what needs to change. First thing to get the axe: entertainment. Could you be eating out less often? Can you make your own lunch for work? Do you absolutely need the super deluxe everything-and-a-bag-of-chips cable package? It’s amazing how fast you can adapt to life without certain luxuries.
Other ways of cutting back on expenses includes reviewing your existing plans. Call your phone company and see if they can put you on a better plan. Shop around for a better mortgage rate. Check if you can bundle existing services for a cheaper rate. For those who absolutely cannot live without watching TV, check out this guide that lists out 11 clever ways to watch TV for free. If you’re a small business owner, see if your internet provider has a cost-effective ‘business plan’.
7. Pay off debts
Open the second tab of your spreadsheet titled: Debt Repayment. List the balance owing on each of your credit cards and loans, starting with the highest interest rates first.
Now that you understand what you have coming in and how much you can allocate to debt repayment each month, you can subtract that amount each month until your first column of debt is at zero. Then start onto the next column. And so on. You will be able to see how many weeks or months it will take you to become completely debt free… so long as you live within your means and stopping adding to the debt pile.
If you already have zero debt, you’re awesome! Your extra dollars are heading straight to savings.
8. Stick to it
Keep your eye on the prize and stick to your monthly budget. You might find budgeting apps useful for keeping track of your daily and monthly spending (here are ten top budget apps for mobile). If you’re creative, you can make yourself a vision board with pictures of your dream house, car or vacation destination. Pin it somewhere you will see it each day as a motivation to stay on target.
Your monthly budget will fluctuate as you go, so it’s always good to review it regularly. Don’t be disheartened if you’re not saving huge amounts right away. You’ve already taken the first step to owning where your money goes by creating a monthly budget.
Taking control of your finances will help you stay out of debt, build up a good credit rating, save for your next holiday, and retire that little bit earlier. You’ll also sleep a heck of a lot easier!
If you’re struggling or feeling completely overwhelmed with your finances, call us on 807 623 1915. We offer financial planning sessions to get you a first class ticket on the financial freedom express.