October 25, 2007, 7:00 am

A different type of budget

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance
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money Today, I will present the way I am making my budget. Since the world of personal finance is constantly evolving to a bigger and more complex creature, I thought that the regular budget with 2 columns (expenses/revenues) was not sufficient. In fact, we are now receiving different types of income at different intervals.
Payment flexibility has increased significantly enough that we now have several payment options. For example, you may decide to pay your car insurance on a monthly, quarterly, bi-annually or annually basis. When you try to project your next month cash flow, it’s more than enough to create a big headache!Creating a provision An easy way to overcome this situation, is to re-establish all payments and income on a monthly basis. In order to do so, you put all your type of revenues and payments on an annual basis before dividing this number by twelve. You technically now have a balanced budget that will allow you to get throughout the present year. On months where you are not required to make monthly payments on certain debt, you will generate an extra cash flow that needs to be put away as it was a monthly expense. You can therefore, transfer this money from your regular account to a savings account where you can earn interest in the meantime. By setting an automatic monthly transfer from one bank account to another, you will apply the “pay yourself first” technique and therefore be assured to accumulate enough money to cover for non-monthly expenses.However, I find that this technique makes things pretty complicated as both sources of income and expenses need to be calibrated accordingly. That also creates an illusion of your possible monthly cash flow. In addition to this, you might not be able to put enough money aside for a certain month. In fact, if you divided your estimated tax return of $1,200 (be always very conservative so you will not have bad surprises) over the year, you will wrongly count a monthly deposit of $100. If you plan to build a provision in your saving account of $200 a month to cover you non-monthly expense, you might be short of a $100 in your bank account as you will only receive your tax return once a month.

Another technique

I designed a set of two different budget that I add up at the end of the year to see if I am not in the red. The first budget looks like the regular monthly budget. I draft all my regular revenue (our bi-weekly pay cheques, government allocations and pretty soon; alternative income 😉 ) and all my regular monthly expenses (mortgage payment, Smith Manoeuvre payment, insurances, gas, food, etc). I leave aside everything that does not come at least least once a month. Therefore, I do not count my tax return, bonus (even if I should not budget it!) nor my irregular expenses such as car repairs, clothes, gifts, property taxes, etc.

The first budget shows how much is left at the end of the month once all regular income and expenses have gone through my bank account. It is very important that this budget ends up with a positive balance as you will need it to build a safety net for the irregular expenses. What is the major different with the provision technique then? I count my irregular income to cover for my irregular expenses. In order to do so, you have to make sure that you will get irregular income along the year. For example, I go shopping for clothe or other stuff in my house when I receive my end-of-year bonus. I must admit that this is a very bad habit that I have, but I only budget my bonus for extra stuff such as a plasma TV. Therefore, if I don’t have for one year, it’s not the end of the world.

With this technique, you get a much clearer view of your finance and you will not fall into the illusion that you have enough to cover the end of the month when you have wrongly divided your tax return by twelve. The key is to get over 0$ when you add up you two budget. Be careful, the first one is on a monthly basis and the second one is on a yearly basis!

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The policies of financial programs are formulated by all banks in correspondence with their own specific criteria. In the modern age, the creditcard has been instrumental to meet the financial needs of the customers immediately. Always try to get insurance quote of the reliable insurance company in order to escape any kind of fraudulent chance. If you want to consolidate your interest only mortgage loan, consult the loan consolidator for that purpose. The issuance of payday loans provides the customers immediate cash payments for the short term to fulfill the unexpected financial requirements. The secured loan is taken by giving the actual documents of the property to the money lenders till the last payment as security terms. The consolidated loan program is very assistive for the borrowers to lessen the burden of heavy debts.

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Hi TFB, I enjoy your blog, and find your take on various things financial interesting. One thing that confuses me is that you’ve referred to your smith man. payment as part of your monthly budget. In other blogs, you’ve mentioned reducing your smith man. pmt due to the cash crunch of mat leave.
In the true operation of the smith man., the ‘payment’ should be a redeployment of the principal paid down by your mortgage payment. Ie, if your $1000 mortgage payment reduced your mortage principal from $100,000 to $99,500, you would reborrow the $500 and invest it, creating a small, but growing, investment loan. I know you get the concept, but I don’t understand why you refer to this within your budget, or would reduce this amount, as it shouldn’t affect your cashflow…

by: The Financial Blogger | October 27th, 2007 (3:20 am)

Hi MJ,

in fact, I operate everything from a HELOC. Which inccurs that I determine what is the payment to be made. I used to make big payment on my HELOC and therefore, had $600 left to invest per month. I decided to reduce my monthly payment in order to fit my budget. Therefore, my interest charges remaining the same, the capital portion (investment in the case of a smith man) has to be lowered. I know it is not the perfect scenario because I am reducing my investment amount, but I prefer to keep up with my lifestyle and enjoy life instead of cutting off my expenses. I am basically going back to a 25 amortization payment instead of 20 per say. I hope that I answered back your question 😉

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