It’s the new year! Time to start fresh and get it started right. Many people don’t even think about doing a monthly budget. Heck people don’t even know how much they spent the last week. The only regret at the end of each month is that big fat credit card statement that arrives in our email telling us how much we spent.
That stressful money hangover feeling we get at the beginning of the month is simply due to poor financial planning. To really get the most out of your money, you really need to budget properly and plan out your expenditures.
Let’s take a look at what a typical budget might look like for a young professional living in an expensive metropolis like Toronto.
The general rule of thumb for savings is 10% of your annual gross salary. This is the before tax number, not the after tax amount that you get every month. It should be noted that the 10% rule applies to long-term savings. This is not saving for a house, saving for a vacation of saving for that Chanel bag you really want. This is essentially your retirement savings, because quite frankly, if you don’t take care of yourself, who will?
The best way to save for the long-term is to automatically withdraw the money at the beginning of each month into an investing account. This “pay yourself first” mentality is the key to successfully becoming financially independent.
Rent, Utilities, Insurance
Most financial gurus say that you shouldn’t pay more than 25-30% of your net pay towards shelter. In Toronto and other expensive cities, this doesn’t apply. Spending near 50% of your paycheck to just live in Toronto is the norm. When you want to live in the Center of the Universe there has to be a price to pay.
Since housing and living costs are a given each month, you should always prepare for these expenses. The worst possible thing is to realize that you don’t have enough money to pay for your hydro at the end of the month. I’m fairly certain that people have no problems recognizing the importance of their shelter costs. If anything, it’s probably the number one thing that Canadians do well, pay their shelter costs on time. No one wants to end up on the street!
Once you’ve paid yourself first, the door is open to spend the rest of the monthly budget as you see fit. That’s the whole beauty of paying yourself first. You’re the first priority and once you know you’ve socked some money away it’s paaaaarty time! This method of budgeting is great because you don’t have to feel guilty that you are spending all your money for the month and not saving anything.
Once you actually figure out how much money you have left over after the essentials, it also makes it much more easier to plan for larger purchases. Have you been eyeing the latest Macbook Pro? Or perhaps you have your eyes set on a new pair of Prada shoes. If you want to make expensive purchases, you can start setting aside your spending money now so that in 2 or 3 months, you’ll have saved up enough to make that purchase.
This practice is called living within your means. Don’t spend more than you make. In this example there’s $889 leftover after all the primary expenses. Make sure to keep your discretionary spending below that. If you actually spend less, that’s great. You’ll have more money to invest!
Shorter Term Goals
If you want to save for an exotic vacation or you’re trying to save up for a house down payment, then that should also be reflected in your budget. In this case, you might have to make sacrifices on a month to month to make that happen. Saving for these large purchases is no different from saving for retirement.
Put the money aside for the down payment, the trip or the car or whatever large purchase you want up front at the beginning of the month. This might reduce your discretionary spending, but that’s the sacrifice you have to make to avoid going into debt. This might mean less money for entertainment or clothes for the month, but don’t let that be discouraging. Remember that once you’ve accomplished your goal, and you finally make that large purchase, you’ll feel a whole accomplished, like you climbed Mount Everest. It’s a crazy, good feeling to make a large purchase without going into debt.
Take The Time And Do It
Creating a budget is time-consuming, but very important. It’s important to understand where you are spending your money because you might identify areas for savings that you otherwise wouldn’t even realize. It will also get you one step closer to financial independence, which is what why you’re reading this blog in the first place. So drop that remote, stop looking at your cellphone and break out the spreadsheet. There’s more important things to do!