When I look back on my own debt journey, I can see that one of the biggest obstacles always standing between me and financial stability was the fact that I didn’t want to budget. Even though I wanted to get organized and I knew I needed to do something to get in control, the word “budget” carried such a strong sense of restriction and going without that it didn’t appeal to me at all. I’m the eldest of three and a redhead, so stubbornness is an integral part of my personality and when I don’t want to do something, I can find a whole pile of reasons not to make it happen! Unfortunately, this stubbornness doesn’t often serve me well, and this was definitely the case when it came to finances.
For me, the turning point came when I decided that enough was enough and realized that something had to give. I decided to channel my stubborn desire not to budget, into finding a way to take control of my money that wouldn’t leave me feeling restricted and frustrated. As with so many things, all it really took to make a change and stick to it was a change of perspective. Rather than using the word “budget”, I chose to focus on creating a system for managing my money. My goal for this “money management system” was to find a way to automate my finances as much as possible and to give each dollar I received a purpose. This way, I could manage my spending, pay down debt and save. Using a system put me in control and there’s something about making choices for yourself (rather than having choices imposed on you) that makes it a whole lot easier to commit to the process.
At the heart of it, a money management system is a way to track how much goes in and out of your accounts each month. It allows you to plan for regular expenses and to put aside money for future expenses such as vacations, home renovations, car repairs and celebrations such as birthdays and holidays. It also allows you to create a plan to pay down debt and build savings. A good system should be simple, easy to set up, and easy to manage. It should also be easy to alter should your circumstances change. You can create your system in a spreadsheet program like MS Excel or on a piece of paper, it doesn’t matter. All you really need to get started is to figure out three things:
1. How much money comes in each month?
A money management system works just like a filter system: money flows in, some gets filtered out for savings, some gets filtered out for expenses, some gets filtered out for debts and what’s left creates a “slush fund”, that you can dip into down the road to cover unexpected expenses.
The first thing you need to know is how much money is flowing into your account each month. Make sure you include all sources of income. If you get paid bi-weekly it makes sense to base your calculations on two paycheques a month. If you get paid weekly, base your calculations on four paycheques a month. If your income fluctuates from month to month (because you’re self-employed or on commission for example) then base your calculations on your average monthly income for last year. Once you have your number, write it at the top of a piece of paper or record it in a spreadsheet.
2. How much do you have to spend each month?
The next number you need is the total amount that you need in order to pay all your bills each month. Expenses can be split into three categories: needs, wants and savings. A need is something you can’t live without and includes expenses related to housing, food, and transportation. For example: rent, utilities, groceries, childcare expenses, and gas. It does not include expenses like cable, internet and eating out! (We might think we can’t live without these but they’re not really necessities!)
If possible, needs should account for no more than 50% of your income, 20% should be allocated to savings (and debt payments) and the remaining 30% covers your wants. Don’t get too hung up on these percentages though, just keep them in mind as something to aim for. I know when I started my system, I had a lot of money flowing out for debts and hardly anything going to savings but, by using the percentages as a guideline, over time I was able to use different strategies to boost my income and “create” more money for getting out of debt and building savings.
Write down all your monthly expenses and then add them up. Subtract your total monthly expenses from your total monthly income and the amount you’re left with is your “slush” money. If this number is positive, that’s a good thing. If it’s negative, you’ll need to figure out a way to either cut back on expenses or boost your income. It’s not always easy but it’s not impossible – I’ll give you some strategies for doing this in my next post.
3. What will you do with the “slush”?
One thing I know for sure is that, if you don’t give every dollar a purpose, it will magically disappear from your bank account and find one of its own!
Some people plan for “miscellaneous” items in their monthly budget but, what I’ve noticed is that often this money gets spent on “stuff” that’s not really needed. An easier method is to make it a habit to pay every bill that needs to be paid before your next pay day as soon as your pay cheque hits your account, set your RRSP and TFSA savings up so that they’re taken out of your account automatically on the day you get paid, leave enough in your chequing account to cover groceries and other planned expenses and then funnel every other cent into a separate savings account. This savings account is what I call the “slush” account. Slush is your buffer zone; the money that you use to cover an unexpected bill or a spontaneous night out or, if your income varies from month to month, the money you use to ‘top up’ your lower income months.
Psychologically, funneling the money into an account intended for savings helps you resist the temptation to dip into it. Try to avoid linking this account to your debit card – it will make spending a more conscious choice if you have to transfer funds between accounts before handing over your debit card. Most people set a limit on their slush account – they try to keep a certain amount of money in it all the time and any extra gets used to pay down debts or is added to either their TFSA or RRSP accounts.
Start Your Money Management System Today
Once you get your system set up, it will take a few pay periods for you to figure out exactly how to get it working smoothly for you. Your goal is to get to a point where you’re always aware of how much is flowing in and out of your account each month and you have a clear purpose for any “extra” money. How you set your system up, is less important than having one in place. Why not give it a try this month?