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Learning Centre

Effective Budgeting Puts You In Control
(November 2004)

By: Cherith Cayford, CFP

Most of us work very hard to earn an income, yet without a budget, a significant portion can quickly disappear into the proverbial black hole. It's as if we're running very hard on the treadmill of life but at the end of the day, we're either in the same place or have fallen further behind. Budgeting is for those who have a plan for a better tomorrow, and it means following these four simple steps:

Determine Your Net Income

Your net annual earned income is the sum remaining after all deductions such as income tax, CPP, E.I., pension contributions and employee benefits. You can find this figure by looking at your recent pay stubs. Add to this any after-tax interest or other income to determine your total net income.

Project Your Expenses

Use the information below to compile your annual expenses projection. Begin by gathering bank statements, credit card statements and any other documents that will shed light on your expenses.

Living Expenses: Groceries Medical Dental Clothing Personal Care Allowances	Housing: Mortgage/Rent Insurance/Taxes Utilities Phone/Cable/Internet Maintenance/Repairs Replacements	Transportation: Loan/Lease Insurance Gas/Maintenance Parking Public Transportation
Other: Support Payments Loans/Credit Cards Professional Dues Life/Disability Insurance Pet Care	Recreation & Education: Dining Out Vacations Club Memberships Donations Subscriptions Tuition & Books Gifts Entertaining	Savings: RRSP Savings RESP

Budgets may unravel if allocations haven't been made for periodic expenses such as insurance and club memberships. Arranging for an automatic monthly transfer to a savings account is a good way to save for these expenses.

Increase Your Income or Reduce Your Expenses

Compare your projected expenses to your net income by subtracting income from expenses. If your projected expenses exceed your income, you're not alone. The good news is now that you've defined the problem, you can begin working on the solution. To bring your budget in line with your income, consider ways to increase income, ways to reduce expenses or a combination of both.

Increasing income probably calls for some personal brainstorming, so here are some ideas to get you started:

1. Is there anything you could do to become eligible for a promotion and more pay?
2. If not, is there a job out there that pays a higher salary with more opportunities?
3. Can you earn extra money either by working over-time, seeking an additional part-time position or starting a home-based business?
4. Is there a room in your home that could be rented out?

Reducing expenses may be easier to accomplish than increasing income. First, examine all fixed expenses such as rent and transportation. Ask yourself if they really are fixed. Could you move into a less expensive apartment or perhaps take public transit to work?

The area that affords the most opportunity for adjustment is that of discretionary expenses, particularly those in the recreation category. Consider cutting back on the number of times that you eat out. Use the public library more. Take a vacation in your own town. Within this category, gifts are a big budget breaker. It isn't uncommon to find people still trying to pay off their Christmas expenses in July! If this happens to you, take a deep breath and contact all adults on your gift list and negotiate to do one of the following: cease exchanging gifts; give a gift of time; or limit the amount spend on each person.

Staying on Track

Maintain a record of your monthly expenses to determine if you're meeting your plan. If you find yourself running out of money budgeted for a certain category, improvise. It may mean moving to a lower cost alternative or doing without for the remainder of the month. In time you'll learn to adjust. Alternatively, determine your weekly allocation for food, entertainment or other items and if you end up spending it all early in the week, again improvise.

One final point. It helps to avoid temptation by staying out of shopping malls, grocery shopping with a list and on a full stomach, and leaving your credit cards at home.