By: Neya Abdi | @neyaabdi
Budgeting is the simplest proactive measure we can take to guarantee our financial security, but we don’t take it as seriously as we should.
A big reason for this is the lack of personal financial education in schools. Many of us simply aren’t taught how to handle our money by our parents. Unfortunately, our parents may not know what they’re doing either – the average Canadian has $21,348 in consumer debt, according to TransUnion. And about 56 percent of Canadians say they have less than $10,000 stored away in an emergency fund. Forty-four percent have less than $5,000 and 21 percent have less than a grand. Financial experts recommend having at least three months of expenses (the ideal is six months) tucked away to touch only in an emergency.
Making a budget doesn’t just allow you to save up for a trip; it allows you to save up for the unexpected as well. So why are a lot of us hesitant to create one?
It’s Not As Complicated As You Think
For people I’ve spoken to, the biggest reason they don’t make a budget is because they simply don’t know where to start. They don’t know whether they should be aggressively paying down their debt, stockpiling money to paying off their student loans, or living on only bread and water. So they abandon the process before they’ve even started. If you’re just starting out, here are two key pieces of advice:
- Don’t be extreme.
- Just get started.
Your budget is a flexible tool that you can adjust periodically to meet your financial changes. Create a budget that gives you room to buy the things you like and do what you enjoy. Your budget shouldn’t be a financial straitjacket. Prioritize so that you are giving up things you care less about in order to spend on the things that you enjoy.
On that note, just get started! Your first budget will not be perfect, and it will likely be a reflection of how idealistic and ambitious you are about saving money. Following a budget takes practice, so just start off simple.
Implement the 50/30/20 Rule to Quickly Make Your Budget
- What to start saving for?
- Whether you should tackle your debt first?
- How much you should put towards discretionary expenses or “fun money”?
Start off with the 50/30/20 rule. It’s the budgeting rule of thumb. Only 50 percent of your income should be spent on needs (this includes rent, hydro, metropass), 30 percent on your wants, and 20 percent should go towards savings and debt repayment.
If you do not have to worry about rent because you live at home, then throw a couple of fixed “wants” in there like your phone bill. If you have the extra money, maybe start contributing a couple hundred dollars a month to your parents just to get into the habit of paying “rent”. But try not to consider your fortunate situation a free for all to allocate 80% towards wants instead of just 30%. You can even put some of that leftover money towards your savings.
It’s as simple as striking two lines across your paper and making three categories: Wants, Needs, Future. And then fill in the sectons accordingly. It’s a quick and simple process.
If you are spending too much on your needs, moving may not be an immediate option, so see where else you can shift your budget. The 50/30/20 rule serves as a no-brainer starting point that you can organically adjust to fit your personal situation.
Should I Pay Down My Debt or Build Up An Emergency Savings?
This depends on your current situation.
If you can only depend on yourself in case of an emergency (you can’t pay rent one month, you need a repair) work on building your emergency fund up first and once you have about three months, start chipping away at your debt.
If your basic needs are met and you don’t have to worry about your food or shelter, prioritize paying off your credit card debt. Interest rates on credit cards are very high and whatever interest you earn in a savings account will never outpace the money you lose paying interest on your credit card. Beat that down as soon as you can, and allocate a smaller portion towards savings.
Whichever option you choose make sure you ALWAYS MAKE YOUR CREDIT CARD MINIMUM PAYMENTS ON TIME!!! You can live with carrying a balance, but missing your minimum payments can very negatively impact your credit score.
Respect the Effort It Took To Make Your Money – You Earned It!
Setting aside a specific amount of money for eating out or shopping quickly teaches you the value of a dollar. You’ll quickly learn the price of that pre-made salad you casually buy and wonder whether it’s worth it when you can put a bit towards that dress you wanted to buy. And you’ll become much more aware of the hard work that went into earning that cash and be less willing to give it away.