Much of my success in saving money and increasing my net worth has to do with my monthly budgets. I mean I didn’t just wake up one day and have a net worth of over 600k. It takes a little planning, focus and discipline to achieve great things. I’m confident that in a few years my net worth will be over $1 million. So to successfully manage my family’s money, I set up a monthly budget so I can track household expenses and maximize my investment contributions.
Time and again I hear people say that they don’t need a budget because “I always pay my bills.” Sure it’s great to be able to always manage to make the monthly ends meet but that’s not what I would call getting ahead. At best breaking even is just keeping your head above water. Sooner or later you’ll begin to sink. After all, it doesn’t take much – an unexpected home or car repair, or job loss and then what? You’ll go into debt just to get by and that is a recipe for disaster.
Budgets are important because they teach us how to manage our money. Being able to successfully manage money is a vital skill if we’re to be successful in our long-term goal of financial independence. I mean let’s face it, if I can’t manage a few thousand dollars how will I ever be able to manage a few hundred thousand or even a few million? Just because the number has a few more zeroes doesn’t mean that the same principles don’t apply. Success or failure doesn’t depend on the amount of money one has to work with. Millionaires go broke and so do billion dollar corporations. So having lots of money isn’t a prerequisite for financial success. Being able to effectively manage that money, however, is!
What Does a Budget Do?
Budgets give us the information that we need so that we can make informed financial decisions about our saving and spending plans. If you want to be financially free then becoming a master at budgeting is a must, otherwise you’ll be flying blind. You’ll never have an accurate picture of where you’ve been, where you are and where you’re going.
Budgets help us to form good money habits by seeing where our money goes. For me, a budget is not simply a benign document that merely shows your income and expenses, but rather a document that shows you where your money could go. So the budget is a document that lets you take action with your finances. You’d be surprised to see how some minor tweaking of discretionary spending can have a positive effect on your overall financial picture.
My monthly budget is a critical piece of information that gives me my current overall financial picture. It’s important because it lets me know where I stand financially each month. By tracking the monthly inflows and outflows of cash, I can determine exactly how much money will be left over (or not) to make extra mortgage payments or to invest. The budget tells me if I’m on track to meeting my annual goals or if I’m falling short of them. This gives me time to take corrective action. So the budget is important because it helps me achieve both my short-term and long-term financial goals.
I also use my budget to forecast where I’ll be in 6 months or a year. Since I run a budget a surplus I like to know how much money I’ll have over a longer time frame so I can make decisions about how to allocate it to our investment accounts, TFSAs and RRSPs. I’m all about getting more bang for my buck so I try to use budgeting as a way to maximize the money going into our tax-sheltered accounts so we can be as tax-efficient as possible.
How to Make a Budget
It’s important to start your financial planning process with a realistic budget. Once you have a grasp of your monthly income and expenses then you can use that information as a basis for creating your budget. After that, it’s simply a matter of having the discipline to stick to your budget. And this is where most people run into trouble because there is always one more thing that we think that we need so we feel like we have to revise the budget. We have to learn to say “no” sometimes to effectively manage our money. Let’s face it, we only have a finite amount of money with infinite possibilities to spend it. Sooner or later something has to give. So once you create a realistic budget, a little discipline is required to stay within it.
Budgets can be very simple or extremely complex, depending on how detailed a person you are. For me, I try to keep things as simple as possible. I use an excel spreadsheet as my rolling budget. I just plug in the money coming in and the expenses going out.
My monthly budget consists of 3 main categories: income, expenses and savings. In the income category I simply record our total monthly net income from our jobs. I don’t include any investment income because it is always reinvested.
Under expenses, I include our total monthly expenses. These are all pretty generic – mortgage payments, property taxes, phone, cable, internet bill, gas utility bill, credit card bills etc. Under the “groceries” heading, our grocery, clothing, entertainment and eating out are all captured. It’s this category that I watch closely because this is where we are most likely to overspend. So I try to tightly control our expenses in this area.
You may notice that I don’t have an emergency fund. I rely on my investments for my emergency fund. It is rare that people need tens of thousands of dollars and if I did I can always sell some investments. For me, it’s all about probabilities. I have never been in a situation where I needed to rely on an emergency fund. If I lose my job, I will work as a temp or find part-time work somewhere. I will do all that I can not to touch my nest egg. Besides, in a few more months, we’ll be mortgage-free, so that will dramatically reduce our cost of living.
You may also notice that, other than our mortgage and an investment loan, we do not have any consumer debt, student loans, car payment debt or credit card debt. That’s not to say that we never had any of those kinds of debts. Luckily, we managed to pay off my wife’s student loan and car in 2011 and our kitchen renovation in 2012.
One of the main things that I target when I create the budget is to try to reduce both the number of bills and our monthly expenses as much as possible. For example, I pay our home and auto insurance annually so I don’t have to worry about them each month. This actually saves me a bit of money because most insurance companies charge a financing fee if you pay on a monthly basis. Once the mortgage is paid off, I’ll pay my property taxes with a lump sum payment to avoid any monthly payments as well.
So here is my monthly budget:
|Mortgage & Property Tax||$2488.50|
|HELOC interest payment||$188|
Between our fixed monthly savings and our budget surplus we are saving nearly 58% of our net income. That number doesn’t include the accelerated amount of mortgage that we are paying. We have been able to achieve such a high savings rate by living below our means and having the discipline to stick within our budget no matter what. The monthly surplus money is what we use to make extra lump sum payments on our mortgage so that we can have it paid off in early 2015. Once the mortgage is paid off, we intend to use the monthly surplus to fill our Tax-Free Savings Accounts (TFSAs), RRSPs and invest the extra in our non-registered investment accounts and our Dividend Reinvestment Plans (DRIPs).