Budgeting for the New Year
When companies want to control how much they spend, they make a budget. People often try to do the same thing, but often struggle. Why? Usually because it's really hard to distinguish between what we need - food, housing, transportation - and what we want - steaks, a third bedroom, a new fully-loaded SUV. That's why, instead of following a strict budget each month, we recommend the 50/20/30 rule:
50% of your Net Income should go toward essentials
Rent, utilities, transportation, cell phone/internet, insurance, and groceries should be about 50% of your net income. If you're spending more than 50% of your income on essentials, consider if there are ways you can cut back - a cheaper data plan or shorter showers can make a difference in your overall financial situation.
20% of your Net Income should go toward financial health
Even if you feel you're not in a great place financially, you should strive toward 20% of your income focusing on future financial health. Pay down loans and credit card debt, put some away for savings, and contribute to your RRSP. If you have children, consider contributing to a RESP (Registered Education Savings Plan) for their future as well.
30% of your Net Income should go toward lifestyle and "wants"
Entertainment, dining out, clothing, and non-essential purchases should be no more than 30% of your income. When you're thinking of making a purchase, ask yourself if this is something you need, or something you want. If it's just something you want, how can you save money and still enjoy it? If you want to go out to a nice dinner, consider skipping the wine or apps and just enjoy your meal. Can you take the bus instead of a cab to the movies? This is often the area where people overspend the most, and is also the easiest to make cuts.
So what now?
You might be thinking, that's all well and good, but how do I start? Take your credit card statements, bank statements, cheques, etc. and add up the totals you're spending in each category. Are the percentages correct, or are they off? Where are you noticing major overspending? Identify a few key areas where you can cut back and commit to small changes - negotiating a better internet package, dining out just once or twice a week, or renegotiating a high interest loan. Don't be too restrictive or try to cut back too much at once - that's a good way to get frustrated and give up! By making small changes, you'll be able to see the effects right away and gradually increase your financial health.