Tax Tip Thursday

Following up with last week’s review of steps to financial literacy, one of the keys I mentioned was budgeting. So let’s have a look at that!

The Steps

Budgeting can be a difficult task, especially if you have a complicated financial situation. Following these steps will help you get on the right track! If you’re still having trouble, please don’t hesitate to reach out for a helping hand.

Step 1: Start with the Facts

I cannot tell you how many times I have sat with a client to do a budget. We create the budget, and then I ask to see their bank and credit card statements for the last three months. They NEVER match the budget we just prepped, and sometimes they’re not even close!

So, your starting point should be the cold, hard facts. Get three months’ worth of statements and go through them line-by-line to get an accurate picture of where all your money is going. If you have online banking, this is easy! In fact, you should be able to just import it into Excel and work from there.

Step 2: Categorize the Data

Now that you have your spending habits in Excel, it needs to be categorized. We have a standard template you can use, or you can just search the internet for budget templates and use one of those. They will all be a little different, but you can pick the categories of regular expenditures for yourself.

First, put your income at the top of the page. Then, put all the categorized expenditures on the page, total them, and compare them to your statements. Here is an example:

• Home Category
  • Mortgage/Rent
  • Property Taxes
• Liabilities Category
  • CRA outstanding balance payments
  • CRA instalment payments
  • Payments towards lines of credit and loans
• Utilities Category
  • Electricity
  • Home Maintenance
  • Heating
  • Water
  • Other household expenses
• Vehicles Category
  • Car payment
  • Maintenance
  • Insurance
  • Gas
  • 407 Bill
• Communication Category
  • Home Phone
  • Internet
  • TV
  • Cell Phone
  • Netflix
• Daily Use Category
  • Groceries
  • Fast Food
  • Meals Out
  • Clothes
  • Alcohol/Smokes
  • Travel Savings
  • Special Occasions
• Kids Category
  • School tuition
  • School trips
  • Sports/Music
  • Day Care & Camps
  • Other extracurricular expenses
  • Miscellaneous expenses

Step 3: Review the Results

Now that you have all the facts, review them. Your income minus your expenses is your net cashflow for a month. I generally take an average by category over the three months and use those numbers as a benchmark. Just be cognizant that if you have significant income or expenses in one of the months it will skew your numbers.

You might be surprised by what you see! Especially when it comes to things like fast food or meals out. A $5 coffee on the way to work every day adds up fast.

Step 4: Make Your First Draft Budget

Prepare your first draft budget. You may need to change some of your spending habits! Be realistic, of course. If you’re in the habit of spending $250/mo on coffee, you might have trouble reducing that to $0 immediately. You should allow for some of your indulgences, but you may have to cut back on them. If you are in a deficit position (earning less money than you spend each month), you will have to cut back more.

A good example is people who have dinner out each weekend. If you’re spending $500/mo on date nights with your spouse, trying to cut it to $0 will not happen. Maybe try cutting it back to half as often, though? You might have more success with that.

Step 5: Make Your Second Draft Budget

Sleep on your first draft, but just for one night! Share it with someone. Review it with your spouse, sibling, cousin, friend, accountant, or financial planner. Even just going through it with someone else after sleeping on it may prompt you to make changes! Maybe you decide that your goal in one category was over the top, but maybe you can survive without a subscription to every streaming platform available.

Run the numbers again and make a new draft.

Step 6: Make your Third Draft

Now that you have a good budget, review it and consider future expenditures that may not be part of a monthly routine. For example, Christmas! This is not a monthly occurrence, but is a significant expense for many and should be considered. Make sure you have room in the budget things like this when you need it!

Lastly, make a goal for yourself. Why are you making the budget? Are you in a deficit and trying to get out? Are you trying to pay down debts faster? Maybe you’re saving for a vacation, retirement, or a down payment on a house? Whatever the case may be, having a goal can help a lot with motivating yourself to make the changes you want to make. Set aside some money each month in the budget for this goal and watch as your savings grow!

All Set, or Do You Need Help?

If you’re all set and ready to implement change, then have at it. Make sure you keep all the drafts you made, too! You’ll be surprised at how much they changed as you went along the process. Make sure to do reviews at least every quarter so you can see how you’re doing with your goals, and how your budget is working! You might need to adjust it, and that’s perfectly fine.

Did you get stuck somewhere along the way? If so, that’s fine. Budgeting can be difficult, and sometimes it’s not easy to categorize all your spending effectively. We will be happy to help you with that! Book an appointment today to get started.

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.