Budgeting

There was a time when a conversation about budgeting was completely unheard of, at least in “polite” public company. Canadians kept their money issues to themselves, and initiating conversations on this topic was generally considered invasive. Today, the topic of budgeting is everywhere around us, from lower school to post-graduate studies, and from home magazines to daily newspapers.

Budgeting is critical at all levels of society — from the lower-income segment through to the ultra-wealthy. Every family must prioritize where it is going to spend its income and how to make sure its income satisfies all of its needs. Financial disasters have affected many families from every level of income, but budgeting can help minimize the potential impact of a financial crisis.

Budgeting comes in many flavours and styles. Today, it is common for individuals and families to work with a financial planner to develop workable strategies that help accomplish specific needs and goals.

One common form of budgeting is to “pay yourself first”. Under this strategy, a savings target is first established along with a target date by which the funds will have been accumulated. Knowing how much you want to accumulate, and by when, is the starting place. Then, the amount that you need to pay yourself is calculated based on an assumed investment rate of return adjusted for income taxes, and the timeline for the savings goal. Once the periodic amount of savings has been identified and the plan put into action, the target savings are carved out of the family’s monthly cash flow, leaving the remainder available for consumption on lifestyle needs. In this way, all items that are beyond the family’s monthly cash flow are cancelled or deferred, with the result that the family should be able to stay in balance and achieve their financial goals. Note that to make this strategy balance, there needs to be a level of reasonableness in savings targets so that the remaining cash flow is sufficient to address all fundamental financial needs.

Savings goals could include some or all of the following: long-term goals such as retirement, medium-term goals such as children’s education or a new home or cottage, and shorter-term goals such as vacations or buying a new car or boat.

Another strategy for creating a family budget, often referred to as the “cookie-jar” method, involves reviewing spending habits to isolate how much money is needed to support different categories of spending. Components could include both necessities along with lifestyle activities — utilities, rent, mortgage, property taxes, food, clothing, child care, travel and entertainment. These components can start to be quantified by reviewing the spending history from the most recent couple of months and then critically reviewing what would be appropriate to spend on each component. If there is no breakdown of historical payments, a forward-looking approach is to track the spending in each of these areas over a two to three month period. Be warned, however, that while two months of expenditures is a place to start, families must also keep in mind that much spending is lumpy (insurance premiums, for example) or seasonal (for example, snow tires or gardening expenses, school supplies, vacations, gifts, etc).

How a particular family chooses to develop a budget will depend on the circumstances of the family and their ability and determination to stick to a plan. More important than the type of plan is the ability to stick to the plan and review it periodically to account for changes in family circumstances and goals. A financial planner can help not only in setting up the original budget plan but also in its periodic review and assessment of progress.

E.O. & E.

About The Author

Mark Schneider
Mark Schneider is one of Canada's leading Chartered Financial Planners. For over 30 years he has helped hundreds of regular Canadian families grow small fortunes through consistent planning and wise advice. He holds the following designations: CFP, CLU, CHFC, CFSB

Get ready for your new life. It’ll be a great ride!

OUR

MA Scheneider

Perspectives Articles

SCHNEIDER INSURANCE UPDATE

Markets have moved higher for yet another quarter.  Encouragingly, la...

METABOLICAL – A BOOK THAT TIES IT ALL TOGETHER

I’m getting married at the end of August to my wonderful fiance...

Maxed Out

Looking for a family movie to watch?  I’ve got a great suggestion f...

AN IDEAL RETIREMENT MEANS DOING WHAT YOU LOVE

I’ve had a few clients ask about retirement lately.   Not theirs, b...

SCHNEIDER INSURANCE UPDATE

Despite some recent volatility, stocks have continued to move higher o...

PROPERLY VALUING MOTHERS FOR INSURANCE

The financial business is often associated with life events.  One suc...

We Celebrate Savers

At M.A. Schneider Insurance, we believe the saver deserves to be celebrated.

After all, it’s the saver that is conscientious every day to gradually create wealth for all.

That habit not only creates security for them but for their families and for the community as a whole.

We think they sometimes lose sight of how important they are.

This blog is here to help them. To help inspire them to stay the course and ultimately lead the great lives that they deserve.

Here’s What to Expect

1. Insight we gather about what’s going on that may affect the long-term quality of your life…

While there is a lot on the Internet, we know that making the best decisions for your life is often based on knowing just what your options are.

2. We hope that understanding what’s going on will help with perspective on what you can do.

3. New innovation and resources you can seek out.

This blog will offer an insight into the future because whether we like it or not, we’re going there. We’ll do the research to find the innovations that you should know about.