Budgeting and Why It’s Crucial for Your Success.

Gross, yucky, and a waste of time is exactly what I thought when I first considered analyzing a budget for myself. On one hand, I really didn’t want to spend time writing down and categorizing all my daily expenditures. I was already tracking my calories as part of Tony Horton’s P90x program and took most of my mental bandwidth (it’s quite limited to start with). On the other hand, I wanted to delve into the world of personal finance and actually invest, but I had no idea where my money was going and how much I could actually invest.

So begrudgingly, I started to track my expenditures. Initially, I found it quite challenging because

a) I didn’t know what some of the terms were in the random template I got off the web

b) My expenses differed from season to season and week to week. As a type A person, I wanted to know precisely what I was spending, so it was frustrating that I didn’t.

c) I was living at home with my parents and had the plan to own a home, but I knew that my expenses would differ, but had no idea by how much.

Nevertheless, I spent two months tracking and completing a budget. The results were quite eye-opening. For the first time in my life (I was 25 at this point), I actually had a rough sense of how much I was earning and more importantly how much I was misspending.

This exercise was quite formative at the start of my financial journey, especially after my first professional tax filing (I realized how disorganized I was) and that is why I am an advocate of it. But it is not the holy grail and should only be utilized as a part of your financial toolkit.

Ramit Sethi, author of the best selling book “I will teach you to be rich”, despises budgets.

‘Create a budget!’ is the sort of worthless advice that personal finance pundits feel good about prescribing, yet when real people read about making a budget, their eyes glaze over. You look back at the end of the month, you feel horrible, you feel guilty, and you realize you overspent. Budgets make us feel bad about ourselves, they don’t provide any forward-looking information — they’re just pointless,” - Says Ramit.

I’m not one to disagree with a personal finance expert in Ramit, but I do believe there is a time and place for it. It’s true, that budgets often leave you in a negative state, sometimes a depressing one. However, I do believe pain is a main driver of change ( I see it every day in my physiotherapy practice), and often people will only contemplate change when something has negatively affected them. Another important point that Ramit mentions is that they are backward-looking, and we don’t live in the past. So it is imperative to understand what your future goals are and what income and expenses you can forecast (and be very conservative with your income and liberal with your expenses). With these aspects in mind, I think budgeting can be a crucial part of your financial journey.

So much so that I have created a Free Budget Spreadsheet for you to download.

Here are the spreadsheets I use and what their purpose is:

1. Net Worth Statement: At a snapshot at a time, review all your assets, and liabilities to determine the value remaining

2. Monthly Budget: Reviewing your income (s) and subtract your expenses (fixed, variable) to determine your monthly surplus or deficit

3. Household Budget: Review the monthly expenses of owning your home. It is a common misconception that your primary residence is a great investment, few people review the exact costs/maintenance required to maintain your home.

4. Rental Property Cash Flow Statement: Review your income (s) and subtract your expenses (fixed, variable) to determine your monthly cash flow. It is not as simple as your rent minus your mortgage and property tax

5. Return on Time: My favourite metric. What is your time actually worth? Why should you care,?! Only because it is the most valuable non-renewable resource we have. Reviewing every one of your income sources, the total yearly value, and the time that is committed to it to determine a dollar value of your hour of time.

These spreadsheets are really basic by nature and please don't feel obligated to use them. There are other tracking platforms like  YNAB (you need a budget)  that will make your life streamlined.

Convinced that you need a budget now?

Let’s start with a few basic terms taken directly from a great resource in personalfinancelab.

“Needs are the things you must purchase in order to survive. They include necessities such as rent, utility bills, groceries, and medical expenses.  They also include legal responsibilities such as paying taxes.

Wants are things that you chose to spend money on, but in theory they are items you don’t really need.  Eating out, holiday gifts for friends and family, TV/streaming subscriptions, and new clothes might be in this category.

Fixed expenses are items whose cost stays the same from one month to the next.  This means you can reliably plan for these expenditures. They include expenses such as rent, your cell phone bill, or a subscription fee for a video streaming service.

Variable expenses change from month to month, so it is hard to plan accurately for these expenses. They might include how much you spend on fashion, how many times you go out to eat, or how much you spend on gas for your car.

Some of your expenses may need to be split into smaller categories.  For example, food is a need, so you could try to lump all of the money you’ve spent on “eating” into one category.  But it’s more honest and will help you create a realistic plan if you separate your food items into categories such as groceries, coffee, and eating out.”

Next let me share with you a few different types of budgets. Josh Smith and his outstanding platform, The Market Hustle, and newsletter outlined 6 popular budget styles. He also packages this in his ULTIMATE WEALTH BUNDLE, which I have personally used in many aspects of my personal and professional business.

1. Zero-Based Budgeting

Every single dollar you make is given a job. The aim of a zero-based budget is to make sure that your income MINUS (expenses/investments/savings) equals zero every month.

So if you make $3k in a month, you will plan out where every dollar will go.

 2. 50/30/20 Budget Plan

This budget plan allows more flexibility. The idea is that you'd divide your monthly after-tax income into the following categories:

50% Needs (Housing/Car/Food)

30% Wants (Vacation/Movies/Bar)

20% Saving/Investing/Paying Debt

 3. The Cash Envelope Method

How it works is you create a budget. Then, you take out all of your money in cash and separate the cash into different envelopes for different categories. For each category, you can only spend what is in the envelope. This is great for overspenders as it only allows you to spend what you have in the envelope.

4. The Reverse Budget

This plan takes a "pay yourself first" approach. And offers the most flexibility. Instead of focusing on monthly expenses, it focuses on what really matters for your future: investing.

Example: Investing 20% of all income and then living on whatever is left.

5. The 60% Solution Budget

This is a fast way to structure your budget without having to account for every single dollar.

60%: Committed Expenses (Rent, Car, Food, etc)

10%: Savings

10%: Debt

10%: Investing

10%: Entertainment (for sanity)

6. 50/40/10 Aggressive Wealth Budget

This is a great plan for high-income earners who want to build wealth and aim for early retirement.

50% of Income - NEEDS (rent, car, etc)

40% of Income - INVESTMENTS

10% of Income - WANTS (vacation, movies, etc)

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Now that you understand the basic terms of a budget, and have selected a certain style, you may be curious about the next steps to investing that money (that is hopefully left over aka a surplus). I will touch upon something I have dubbed the 7-Step Savvy Saving System.

7-Step Savvy Saving System

1. Budget and Reduce Expenses (it’s not how much you make, but what you keep)- use the free spreadsheets below to help track your expenses!

2. Create an Emergency Fund (you’ll be thankful you have it during the next crisis)

3. Match Employer Retirement Funds - it’s kinda like getting ‘free money

4. Pay Down High-Interest Debts (credit cards, student loans, car loans)

5. Save for large purchases/ personal investments (wedding planning, registered investment vehicles, RRSP, TFSA, FHSA)

6. Save for retirement (define what ‘retirement’ looks like for you)

7. Pay down low-interest debt (secured lines of credit, generally because this is substantially lower than credit card debt)

* This is a generic template and not intended to provide any sort of financial advice or to be interpreted as such