There is no doubt we are living in times of austerity. There are many different reasons, but most people are scaling back their lifestyles. For some, it’s to repair balance sheets thrown out of whack by a surprise market crash. For others, they have decided to tackle a mountain if debt brought on by a consumer lifestyle that has finally, and of necessity, fallen out of fashion.
Whatever your personal reason for looking to cut back, the fact is you need a place to start, and a routine to keep you going. So where do you start on this quest for fiscal responsibility.
Most financial plans tend to offer you projections of the future. They calculate how much money you need to save each month to reach your financial Nirvana and, helpfully, give you a print out showing that Nirvana once all that hard earned cash has been socked away.
The problem with most financial plans is that there is scant attention paid to the issue of exactly where do you find that extra five hundred or even five thousand dollars a month to push into a retirement account. We can project all we want, but unless you can actually come up with the dollars, your projections are not going to be worth the trees you killed printing them out.
Enter the dreaded personal budget. The budget is where you decide what immediate gratifications you can do without in order to save for some future goal. The typical budget planning process involves a well meaning individual (often not in partnership with their spouse) deciding how much is going to be spent in each particular expense category over the coming year. The fuel bill will be cut by 20%, the restaurant bills will drop 40%, and groceries get slated for a 15% haircut and so on.
Budgets constructed in the above manner, however, usually don’t last very long. For one thing, if you want to cut something like a fuel bill, you either have to get rid of a vehicle, move closer to work or get cosy with your bicycle. Just saying that you’re cutting back doesn’t help anyone anymore than a projection that assumes a particular savings rate. Most budgets last a month or two - then the participants decide they just can’t make it work. They throw in the towel and resolve to take another run at it sometime in the future.
The secret to a sustainable budget is to get a handle on where you are right now, before you start deciding on cuts to expenditures. If you are in a relationship, you will also need your partner to buy in to what you are trying to accomplish. You need data.
To start gathering data, pull out the monthly bank statements and credit card bills. Take these bills and statements and put the numbers into either a spreadsheet or a commercial software program like Quicken. If you don’t feel like building your own spreadsheet, go to the copperjarsystem.com website and download our easy to use version.
Once you have three or four months of data you have a reasonable place to start your more realistic planning. Some expenses can be cut and others simply cannot be cut. Fixed expenses that don’t often change are hard to trim, but variable expenses are an easier target.
Your budget also has to be simple. We have complicated lives and trying to keep track of twenty or thirty different budget categories each month is going to get old very quickly. If you have $4000 per month, on average of variable expenses, and you want to get that down to $3000 – take $3000 per month out of the bank account and spend on variable expenses to your heart’s content, until the $3000 runs out. Then don’t spend anymore.
The cash gives you a simple feedback system – you see the pile of bills getting smaller.
If you are serious about getting your financial house in order, check out our recent book “The Copperjar System, Your Blueprint for Financial Fitness”, available at copperjarsystem.com or on amazon.ca
Alan MacDonald is an investment advisor with Richardson GMP Limited. Alan helps investors with over $500,000. of assets make smart decisions about money. He is the co-author of "The Copperjar System, Your Blueprint for Financial Fitness" available on Amazon.
The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates.
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