Budgeting

What is a Budget?

A budget is a list of all your expenses and income over a specified period of time. You start with your income and subtract all your expenses. It’s easiest starting with per month. In order to save money and invest you need to figure out what you are spending money on each month. From there, you can decide which items you need and which you can live without. You can’t always plan for things like storms and car repairs so that’s why you need an emergency fund. If you know you have to spend money on something a few times a year or less frequently than every month, it can help to break those payments up into how much you need to save per month.

Ex: $10,000 twice a year = $20,000 divided by 12 months = $1666.67 per month.

Here are some common problems:

Mint has a calculator to set goals for savings and to make budgeting easier.

Most peoples highest expenses are:

I’ve included a chart of my budget below.

This is my 2021 budget in pie form. Doesn’t it look delicious! I have enough money saved up right now that I don’t need to contribute to my emergency fund. Because my mortgage is low compared to what I can afford I am able to invest a large portion of my money. As you can imagine, my entertainment spending during the pandemic was a lot less so that meant more money to invest.

Ways to Budget and Track Your Finances

A few amazing apps for budgeting and tracking your finances are Mint and Wealthica. If you don’t want to share your banking information with an app you can just write out your budget in excel or google sheets. The most import thing is that you have a budget to track your expenses.

Mint

Mint is an excellent tool for budgeting. It can be linked to a variety of banks and investment accounts. If you link it to your bank account you can see how much income is coming in and how much your expenses are. Over time, you can put all your expenses into categories to track how much you are spending in each category. Once you have this you can generate a monthly budget to see where your money goes each month. Hint it’s not in your washing machine. From there you can add other assets like houses and car debt and see how quickly your mortgage or car is being paid off. Mint also has a goal feature so you can set a date you want to save a certain amount of money by and link it to your bank account. You can also see you’re net income which is income generated minus expenses. If every month you have a high positive net income, some of that money is safe to invest. Another thing Mint does is send you notifications when you make large purchases. Mint also shows you your Networth. It is a good trustworthy company because they own Turbotax and Wealthsimple.

Wealthica

Wealthica is an incredible tool for tracking your expenses and stock portfolio. You can link Wealthica to your trading accounts and directly compare your account performance to the S&P 500, TSX 500, Nasdaq or pretty much anything else. If you find that these market indicators are always out performing your portfolio by a long shot it may be time to start only buying ETFs that track these indicators like VOO or QQQ. It’s nothing to be ashamed of if your stock picking skills aren’t great, being good at anything takes time. Another area Wealthica excels at is tracking your dividend income. After using Wealthica for a year you can easily find out the average amount you make per year in dividends. You can also link bank accounts so you can view your transactions and investment performance all in one place. Wealthica also shows you your Networth.

Ways to Save on Expenses

The first thing to do is check if you have any reoccurring payments for services you don’t use and cancel them.

The three main expenses we are going to deal with here are from most expensive to least housing, transportation followed by food.

Housing

Housing may be trickier to save money on. If you’re younger roommates are a good choice. Just make sure you learn enough about them beforehand to see if they’re a good fit. If mystery dishes keep piling up someone will be upset. If you are able to buy a house consider one that has a basement or garage suite you can rent out. Renters can be a hassle sometimes so if you want to live on easy street just buy something on the lower end of your budget so you can invest the rest. There’s a reason condos have condo fees. If you own a home a portion of your income each month should go towards your home improvement fund. This can be part of your emergency fund.

A common rule for housing is don’t spend more than 30% of your gross income (before tax) on a monthly mortgage. If I add up my mortgage, condo fees, and property tax my housing costs are 31% of my budget. However, only 24% is from my mortgage. CNBC recommends the 30/30/3 rule. This is method A.

Method A Example:

• Gross Income = $66,667/year

  • 30% = $66,667/12*0.30

    Max mortgage = $1,667/month

    This method does not include expenses that are different for everyone. If you don’t own a car you could afford to spend more.

Another popular method of figure out how much you can afford is the cash left over method B. 3 Steps:

1. Take your net income (after tax, EI, CPP, etc.) and subtract 15-20% for saving/investing.

2. Take the value from step 1 and subtract all your other expenses.

3. Take the amount from step 2 and decide how much of the remaining amount you want to spend on housing and other non-essential expenses.

Method B Example:

Here’s an example:

• Gross Income = $66,667/year

• Tax rate = 25%

  • Net Income = $66,667/year/12 *(1-0.25)

  • Net Income = $4167/month

• Saving/investing rate = 20%

  • $4167/month * (1-0.20) = $3333/month

• Expenses = $1500/month

  • $3333-$1500 = $1833/month left over

  Max mortgage = $1833/month

  This method takes into account savings and expenses. The lower your expenses are, the more you can afford to pay for a house. The lower your savings rate, the longer it will take to be financially free.

Transportation

It can be challenging to save money on transportation. Walking or biking more often can help. Not only will you spend less on gas, but your car will also need maintenance less often. Another way I’ve looked at is by buying an electric car. With the amount, I drive and the extra premium I’d pay to buy the car compared to a gas car I wouldn’t save any money for many years. The price of electric cars is dropping, so it’s definitely worth looking into in the near future. If you think you might you might drive enough to justify an electric car, you can try this electric car calculator from Walletburst.

Food

The easiest one to save money on is food. A $3 cup of coffee every single day adds up to $1095 per year! I can think of better ways to save or invest that money. Eating at home more will save you a ton of money! Consider buying an instant pot and making a few large dishes. If you can handle eating the same thing for a few meals it will save you money by throwing all the ingredients in so very little goes to waste. I freeze my leftovers for quick meals later on.