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July 6, 2016, 1:02 pm

5 First Steps to Building a Successful Budget

by: The Financial Blogger    Category: Personal Finance

 

Formal budgeting is often seen as a cumbersome exercise, yielding more tedium than tangible financial gains. Record keeping aside, the process does furnish valuable insight for those committed to tracking expenses and accounting for household cost of living. The key to maximizing the positive impact of formal budgeting is applying discipline and using the data to take control of your financial life.

In its simplest form, a budget is balance sheet, accounting for income and expenses. And while there are many ways to manage household finances, budgets formalize the process, putting your bad spending habits under a spotlight. Identifying where your money goes enables you to divert resources to more important areas, as you realign spending priorities. Especially when financial difficulties cause cash flow problems, budgeting helps ensure your income stretches to cover all of your expenses.

If you’ve had limited success with prior attempts, or are creating your first formal budget, stick to these basic budgeting tactics.

Categorize – Your household financial flow operates like a small economy, addressing spending in several distinct areas. In order to create a realistic record of your spending, break it into smaller pieces, to track as related purchases. Your “Entertainment” category, for instance, includes spending on movies, concerts and music downloads, as well as cable TV subscriptions and nights out with friends. Another classification, called “Food and Dining”, captures spending at the grocery store and money paid for prepared meals. If your gastronomic explorations are more like entertainment than sustenance, you may choose to file restaurant costs in that category. The key is remaining consistent, so categories reflect the same type of spending each month. Additional categories to consider as you track spending:

  • Travel/Transportation
  • Automotive
  • Household/Utilities
  • Clothing
  • School
  • Medical Costs
  • Your Own Unique Classifications…

Track Spending and Income – Effective budgeting balances income with outgoing spending. In order to build a meaningful budget foundation, it is important to closely track spending for an extended period of time. For the best results, note purchases in a ledger each month, for at least three consecutive billing cycles. Once each month is complete, budget columns can be reconciled, so you know exactly how much money was spent in each category. Over time, subsequent months can be used to identify and compare spending trends.

Accounting for income is fairly straightforward when it comes from a single source, but you should also include money made on the side. Investment returns, hobby businesses, and even gambling winnings should all be included in your plus column, before you begin to tally expenses.

Set Spending Limits – Once you’ve accumulated personal financial data, it is up to you to put it to good use. Using your established categories, turn your eye toward budget savings, setting spending limits in each category. Discretionary purchases yield the most potential for trimming, because ‘fixed’ monthly expenses do not change substantially from month to month. Be realistic, but also challenge yourself with budget limits forcing you to spend sensibly.

Make Adjustments – Even with several months’ worth of spending records at your disposal, it can be difficult to craft a manageable budget. Start with core costs, addressing big-ticket obligations like mortgage repayment, car notes and other fixed monthly costs. As you rein-in your discretionary budget, leave room for adjustments. A cancelled subscription, for example, can always be reinstated, should your budget yield resources to cover the cost. Likewise, ineffective budgets can be tightened further, when cost-cutting measures don’t add-up to sufficient savings.

Show Resolve – Budgeting is a directed effort, so commitment and resolve are key ingredients for success. If budgeting is uncomfortable, you are probably doing your job, leaving no spending unexamined. To assist those put-off by the process itself, budgeting apps and software simplify record keeping and furnish intuitive tools for managing cash flow. Use these and other resources to remain steadfast throughout the initial formal budgeting process. Once established, your budget becomes increasingly easy to maintain, as good habits replace poor spending outcomes.

Without an accurate understanding of where your income is spent, it is difficult to take control of your personal finances. Formal budgeting highlights cash flow trends, illustrating where your money goes. Armed with a ledger tracking expenses and a commitment to maximize resources, it is possible to carve out savings and stretch your financial reserves. Use these 5 steps to jump-start your personal budgeting resolve.

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April 20, 2016, 6:01 am

Using the Bucket System

by: The Financial Blogger    Category: Personal Finance

 

Budgeting… wow, this is something I haven’t done for soooo long!

 

As you can see, I’m becoming a lot more conscious about my debt repayment plans this summer. Once my wife starts her daycare in September, I want to put a super solid plan in place where we will kill our consumer debts within two years. In order to ensure my goal is achieved and I actually put this plan to work, I’ll setup a “bucket system” where I will pay myself first into several accounts.

 

What’s a Bucket System?

 

A bucket system is definitely not a new approach to personal finance. Many of my good friends use it and it definitely works. However, it requires discipline and a strict budget (or a lot of money coming in, hahaha!).

 

The goal is to receive all your income into a single account which is already the case for my wife and I. Then, the money is distributed into several other accounts called “Buckets”. Each bucket has its own purpose. Depending on your goals, you may have 1, 2 or 10 buckets. It’s a very effective way to make sure the money you earn is used for what you really want.

 

It also minimizes surprises in your budget. For example, I pay my municipal taxes as required by my city. This means that I make about 9 payments throughout the year to pay them in full. So I have some months where my municipal taxes are “free” since I don’t have to make a payment and others when I have to find about $400 to pay my bill. This $400 is sometimes a “surprise” in my budget when it happens. With the bucket system, I could easily split my yearly tax amount to be paid into 26 bi-weekly payments where I could take money from my bank account and save it in a bucket. Each month I need money to pay my taxes, I simply have to withdraw it from the bucket and it doesn’t affect my regular bank account.

 

My Own Bucket System

 

Without knowing so, I’ve already started my bucket system with my RESP and TFSA systematic investments. I will now just create more buckets to make sure my budget is under full control and that I concentrate the bulk of my extra cash in paying down my debts.

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I already have my RESP and TFSA setup this way as I mentioned before. This money is automatically invested in mutual funds as it is free of transaction fees therefore it helps me manage a small amount of money. Eventually, I’ll probably buy stocks with my RESP as it is growing rapidly.

 

The line of credit payment will be used to drop it and generate liquidity. Each time I have enough room on my line of credit to pay off another debt as my pool loan is at 6.45%, I will draw a check from my line of credit to pay it off completely. I will then apply the debt snowball method to increase my line of credit payment and clear the next debt. The goal with this strategy will be to decrease my monthly payments used to pay consumer debts. Then, I will convert a part of my home equity line of credit debt into a flexible variable rate home loan.

 

Then, I will create three more buckets where money will be systematically invested in money market funds. I will grow an emergency fund for both house and car maintenance. The “fun account” will be used for several purposes such as paying for gifts, clothing, vacations and sporting activities.

 

Buckets are Restrictive but Efficient

 

The reason why I’ve been avoiding buckets my whole life is due to their highly restrictive aspect. Since the money is leaving your bank account as soon as it is being deposited, you have no room for extra spending. This is why it’s important to have a well balanced (and positive!) budget before you start with a bucket approach. There is no point of saving your money into buckets if you are about to take that money out to finance your lifestyle all the time!

 

On the other hand, buckets are highly effective since they serve a single purpose: putting money aside! The good news is that if my car doesn’t require maintenance this year, I will have a lot of money saved for bigger repairs in the future; same thing with my “fun bucket”.

 

The bucket system will start for my family in October 2013. Since we have committed to several expenses for the daycare between June and August, I will need the $2,000 generated from the daycare to balance my extra spending from the summer. Then, in October, I should be ready to start a new life!

 

Readers, have you tried the bucket system to manage your personal finances? How did it go?

 

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January 28, 2016, 8:00 am

Saving and Making Money in 2016 – How to Invest and Where to Save

by: The Financial Blogger    Category: Personal Finance

New Year has come and gone, and 2016 is slowly marching on. Now that January is all but a memory it’s time we all sat down and had a look at our finances. For many people around the world this doubly true with April, and the end of many country’s fiscal years, getting steadily closer. If you’re looking for ways you can save money in 2016, whether that’s for paying off bills or because you’re looking to start your very own investment portfolio, here are a few tips to help you get the ball rolling.

  1. Take a long hard look at your spending habits over 2015

The first thing you need to do if you want to make a difference is taking a look at where you’re starting from. How much money did you make in 2015? Where did that money go? How much debt do you have to pay off? Take a look back over your spending for 2015 and try to get a rough idea of your spending habits. If you can’t make head nor tail of where your money went, track your spending over the course of the next month and multiply that by 12 – while it may not be an exact reflection of your annual spending, it will give you a ballpark figure of how much you spend on things like coffee and cigarettes.

 

  1. Build a better budget for 2016

Now that you have a rough set of figures in mind, you can start working out where you want to save money. Any money you save can be put towards something else, whether that’s paying off debts, paying towards a holiday or wedding, or even just putting aside to invest later on. If you need any help with the way you build or format your budget, there are plenty of free online tools and resources you can use.

 

  1. Shop around for better rates

There is a surprising amount of money which can be saved by changing everything from your energy provider to the people you bank with. Shop around for the best rates and be aware that the introductory bonus rates that you were given last year probably won’t apply for much longer. If you change any given account to one offering better introductory rates, you could feasibly save up to $150 per year – do that 5 times and you have an extra $750 to play with. Every little helps, as they say.

 

  1. Consider consolidating your debts

If you’re struggling with multiple debts it’s well worth looking into the idea of consolidating your debts into a single easy to pay loan. There are a huge number of loan products on the market which can help you do just this, though the products available to you will differ based on your location. If you live in England this could be an IVA; if you live in Scotland you could apply for a Scottish Trust Deed; if you live in the US there are further debt consolidation loans you can look into. Just make sure that whoever you talk to, whichever country you live in, you seek professional advice from a financially responsible, regulated body.

 

  1. Work out how much you’re ready to risk

If you’re looking to invest your money you need to be aware of the risks. No investment is entirely safe, regardless of what you may have heard elsewhere online. The old adage ‘no risk, no reward’ is actually truer in the world of investment portfolios than almost anywhere else.

 

There are several ways you can invest your money, from discretionary portfolio management where you leave your financial decisions to a professional investment firm, to portfolio management options where you set the rules over how and when you want to sell your investments. Either way you need to make sure that you’re happy with how much you’re risking when you step into the arena. Every investment is a risk which may or may not land you a substantial reward. Depending on the company structure, you may actually become liable for further losses too, so make sure you do your research before you start investing money.

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April 30, 2014, 5:52 am

How Much Do You Need To Live Comfortably?

by: The Financial Blogger    Category: Personal Finance

 

 

Last year, I went through all kinds of questioning about my budget, future, job and online company. I really needed to put down on paper how much I needed to live and create a comprehensive budget.

 

Doing this exercise was great not only to focus on debts but also to realize how much I needed to live the good life in my own terms. Some people only need a couple thousand per month to live comfortably while others think they couldn’t live without spending 10K a month. It’s all about your priorities and what makes you happy…

 

WHAT MAKES ME HAPPY IN MY DAY TO DAY?

 

The first question I asked myself was what the most important things were for me. I’m not talking about my family and other personal values here but what is important in terms of material things. For example, I LOVE my house. There is no way I’m giving up my house in my budget. It fulfills all our needs and then some. We are incredibly comfortable in it and even benefit from the daycare at home (we have a separate entry and a room dedicated to my wife’s business). Living in this house definitely makes me happy in my day to day.

 

On the other hand, my RX-8 wasn’t bringing me enough happiness compared to its costs and wasn’t kept. While the car didn’t have any loan strings attached to it, gasoline and sporadic mechanical problems were enough to make me sell it. Life is a little bit more complicated with only one car and I’m considering buying a second car eventually but this will be a small economical car this time. I’m done spending money on wheels.

 

Saving money for my kids’ education and retirement also makes me happy. There is no way I’ll jeopardize their education or my retirement. This is why I’m putting almost 10K per year in my investment accounts.

 

I also love food and wine and I’m not willing to cut out much of my food bills. I’ve made some efforts with wine and restaurants but I really enjoy a nice meal with a great bottle of wine!

 

MAKING 2 BUDGETS AND DECIDE LATER

 

When I crunched the numbers last summer, I came up with two different budgets; the first one was the one I need to live comfortably (meaning I don’t compromise on anything) and the second one was the one with strict minimum expenses.

 

It had helped me to realize what I can really cut out in case of bad luck and what I could already cut today without weeping on the floor. This is how I realized I need about $4,500 monthly to live comfortably. Therefore, I need to find a way to make $54,000 net of taxes each year to keep what I have in place. Where I live, this is about 100K before tax. This is not an easy task but I have managed to reach this level of income since the age of 28 (you can read about the chronology of my income here).

 

I’m curious to know what your magic number is? How much do you need to be happy? What do you think of my number? Is it too high, too low?

 

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April 15, 2014, 5:00 am

What is The Best Emergency Fund?

by: The Financial Blogger    Category: Personal Finance

 

 

It may sound like a financial planning topic but this is only common sense: you need an emergency fund. If you are young and starting your career; you need an emergency fund to cover for a job loss. You have a young family and a mortgage; you need an emergency fund to cover a broken washing machine. You grow older, don’t have any debts; you still need an emergency fund to cover for healthcare. As you can see, all your life, you will need an emergency fund.

 

HOW MUCH SHOULD BE IN AN EMERGENCY FUND?

 

In financial planning, we often talk about 3 to 6 months worth of salary. If I look at my own situation, this would mean having $16K to $32K. This is a huge stack of cash to be sitting in my bank account doing nothing. Worse than that, if you are like me and have a young family, you know all to well that your money is going towards groceries, activities and clothing. Therefore, there isn’t enough money left to #1 pay off your debt, #2 save for retirement, #3 pay off your mortgage and #4 build an emergency fund.

 

SO WHERE DO YOU GET THE MONEY TO FUND IT?

 

We will all agree that we need an emergency fund. If tomorrow I need $5,000 to repair my house or because I’ve lost my job, I don’t want to put this money on my credit card. The problem is often finding the money to build your emergency fund. Most people can’t save more than 1-2K per year (besides all other obligations). So how can you save 3 to 6 months worth of income?

 

This is when you have to think outside the box and leave the savings bank account to frugal people. I will never be able to save that much money in my bank account, so I’ve figured out other ways.

 

 INSURANCE

 

Huh? How can spending more money on an insurance contract assure that I won’t need an emergency fund? By taking disability (or salary) insurance. This type of insurance kicks in when you are unable to perform your work. If you are depressed, ill, or break your leg, you can use disability insurance. This will compensate a part of your salary and will help you avoid falling into credit card debts. I have a pretty good plan insuring 70% of my paycheck in the event of disability. This would be enough to cover most of my expenses already.

 

Disability insurance is also offered on credit products to cover your payment (for a mortgage as example). Unfortunately, it is not cheap.

 

HAVE ANOTHER SOURCE OF INCOME

 

I just read an interesting take from Dividend Mantra saying he would rely partially on his dividend payoutsif he were to lose his job tomorrow. Last month, he made $700 in dividends and this is enough to cover his rent. Not bad, huh? In my opinion, having a second source of income is probably the best solution to fund your emergency fund. The money doesn’t sleep in a bank account in the meantime, but will quickly take care of part of your bills if you lose your job.

 

My dividend income is all in a registered account for tax purposes. This is why I can’t use Dividend Mantra’s technique. However, I do have my online company generating several thousand per month. If I was going to lose my job, I would not go for another one. I also have my employer stocks which fluctuates from 1K to 5K most of the time (this is because I keep selling them each year to pay off other debts).

 

HAVE A LINE OF CREDIT

 

If I have an unexpected one time purchase to make (like a washing machine or an expensive car repair), I also have a line of credit. I could put a few thousand dollars on this as well if I had an urgent need for money. I would rather use a line of credit as emergency fund than having 10K or 20K sitting in a bank account earning 1%. This idea is simple; you are losing money if you use real cash to fund your emergency fund. You could save interest on your debts or make money investing if you would use this emergency fund instead of having it sleeping in a bank account. This is why I think it’s better to pay off your debt but leave a line of credit open and available on the side for emergencies. If you don’t use it, the line of credit is free of charge!

 

HAVE AN EMERGENCY LIST INSTEAD OF AN EMERGENCY FUND

 

I often talked about the importance of having a plan B on this blog. The idea of a plan B is to get a way out of financial trouble in case of an emergency. When something bad happens in your life, your emotions put you on the edge and your head doesn’t think right. If your emergency plan is already drafted, you only have to look and follow it. No second thoughts, no hard decisions to make. They were all done in the plan when you had your mind set to think about it.

 

The good news is building an emergency list is not too hard nor complicated. It only takes a few minutes of your day and it can be revised on a yearly basis to make sure all your solutions are still in place. Here’s mine as a reference:

 

#1 70% of my income in case of disability (insurance)

#2 An average of 3K quickly accessible through my employer stocks

#3 A side business where I could rapidly withdraw 3K per month to sustain my lifestyle

#4 An average of 3K available on my line of credit to withdraw at anytime

#5 If I was going to lose all my income source for a while, I still have 50K in a registered account where I can withdraw money from it but pay taxes

 

*If you want to read more about this, I’ve already described my plan B here and there.

 

Do you use cash to fund your emergency fund or do you use other means? What do you think of my plan?

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