This is definitely one thing I really like about my new job is that I have access to so much financial information that I can’t run out of ideas for my blog! As financial planners, we are in front of an obvious truth: Everybody should have a budget, but most people don’t do it. Is it a lack of interest? A Lack of time? A bit of laziness? A surplus of cash flow? Or even a lack of financial education? (thx to our Government for this one!).
Regardless the reason, we have to design plan and help people that don’t even want to hear about budgeting. This is where somebody came with the idea of establishing a cost of living for each client. It takes about 2 minutes to write down and you have enough information to design a solid financial plan.
So how does this thing work?
Quite honestly, it is so easy that it really sounds stupid:
– Write down your income
– Deduct your taxes (in order to have you net income)
– Deduct your monthly (or yearly) savings
– You now have your cost of living!
In order to avoid any headaches, you can also skip the amount you pay in taxes and look at your saving capacity.
How does the cost of living replace a budget?
If you look at it on a cash flow point of you, your savings capacity demonstrate what you don’t need to live since you spend the rest of your pay check elsewhere. So if you want to buy a new car with monthly payments of $500 and you determine that you can only save up to $300 a month, you simply can’t afford it.
Instead of playing with columns of numbers, drop one category of your budget and increase another one, you can simply try to save more money every month. If you can change your spending habits and put $500 aside several months in a row, you now can buy your new car (knowing that your saving capacity will drop down to $0).
So if your cost of living is superior to your income or if your savings rate is not high enough, then it would be useful to make a full budget. The cost of living is definitely a quick way to see if you are on the right track with your project.
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