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A friend of mine pointed out that a household budget is just simple addition and subtraction. When you get down to it, that’s really what it boils down to. Can you add up what you earn and then subtract your expenses (all of them)? I have found the easier budget worksheets list all your expenses on one area and then your income in another part. Hopefully the income is greater than the expenses. Adding and subtracting. Easy math.
Frugal Village has a really good worksheet here. It’ll remind you of all the things that you are paying for.
I read in a magazine article featuring Gail Vaz-Oxlade, Canada’s financial guru, where she says that people who are successful with their money are able to delay instant gratification.
Wish lists: if you want something and it’s not in your budget, put it on a wish list to save up for. Very often you’ll find that by the time you have saved up the cash for it, you probably don’t want it any more. And if you want it, now you can afford it with cash.
Many people have a small book in their car or purse and they jot down smaller expenses to keep track of them. I applaud these folks but, for some, this is not workable.
A few days ago, I heard of another method - use your kitchen or office calendar to mark down expenses as they happen - coffee runs, clothing, movie rentals, take-out food. This way, not only can you see how much spending you are doing but you can also see when it is happening. You can get a good snapshot of the month and how much is going down the drain.
Differentiate between needs and wants. Needs come first. You need food but you want steak.
Get it? Differentiate between the two.
Cover your needs first – rent/mortgage, food, clothing, transportation to your job. The needs are your priority. You need a roof over your head. You need food.
Do you only buy the things you need? No. Life should be enjoyed.
Wants like designer clothing, glittery jewelry, electronics and vacations get budgeted for.
I watched a few episodes of Til Debt Do Us Part which is a show in Canada on the Slice Network and in the US, it’s on CNBC. Some of the featured couples and their stories are just cringe-worthy. Most of them spend like drunken sailors. I noticed that spending problems create marital problems. Apparently, 90% of marriages break up because of money problems.
Try out her budget planner. On page 4, there is a test for couples on money. It looks at your spending habits but it also addresses your goals. Gail Vaz-Oxlade (the host) has a 12-step program for getting your finances in order.
Her suggestion for breaking down your expenses:
(These are percentages of your net pay)
- 30% housing/utilities/taxes
- 14% auto
- 11% food
- 7% entertainment
- 5% insurance
- 5% debt
- 6% clothing
- 5% savings
- 8% misc
- 5% investments
- 4% medical/dental
Vaz-Oxlade gets the couple to use jars with cash in them. When the cash is gone, that’s it until the end of the month. I don’t necessarily agree with the percentages but it’s a starting point for many people. With a jar, you can see what money you have to spend. This way, you can’t spend more than you make.
Layaway Plan: A payment plan where a buyer reserves an article of merchandise by placing a deposit with the retailer until the balance is paid in full. The balance is usually paid in scheduled installments, but sometimes it’s paid off in a single payment.
My parents used this in the early fifties to buy furniture. I still had some of that furniture 40 years later.
I have used this to buy a big television. I saved extra cash in an ING account until I had enough money to “spring” for the TV.
Access to credit has made created an instant gratification society. Try your own version of the layaway plan – in a bank account or a jar at home.
In 2002, I purchased a brand new, not-yet-built condominium. It was one of an eight-unit property and the condo was going to be self-managed. In the nineties, I had worked for a fellow who did large building restoration so I knew better than to buy this unit. But it was so pretty and I was sucked into the whole process.
Don’t get me wrong – the place was beautiful. You have to remember when you buy a condominium that you are living with a committee. The monthly fees were set too low by the builder. I knew that we were in for trouble in the future and I lobbied to get them raised. I was outvoted by the committee.
A relative told me he bought a condo in Toronto and they went through three property management firms in two years because the owners didn’t want to pay exorbitant condo fees. They interviewed until they found a property management firm who said they could run the place for the amount they wanted to pay. But the fee was too low. Many new condos start with low monthly fees to entice buyers. The fees soon escalate as they find they cannot maintain the building at such a low amount.
Our condominium had leaks in the basements. Amazingly, this wasn’t detected by the engineer doing the Reserve Fund Study. The whole corporation was probably in for what is called a Special Assessment at some point. Special Assessments can occur because of an unexpected expenditure. The condo may not have a sufficient amount in its reserve fund to pay for the repair and maintain the reserve fund. The Board may decide to levy a special assessment to pay for the work. This can be in the thousands for one owner.
I suggest that if you are set on buying a condo, have an independent home inspection done by a qualified person who is familiar with large residential buildings. You want someone who knows how to inspect your unit – balconies (if you have them), the underground garage, roofing, cladding, caulking, drainage and other building structure issues. Inspect the air conditioning and furnace systems. Look at indicators like efflorescence, which is a white, powdery substance that appears on the surface of concrete, masonry, and stucco products. While efflorescence itself is not dangerous, it indicates the presence of excess water, which can lead to more serious structural issues. Have your inspector look at the Reserve Fund Study and see if it is adequate to cover what will be needed over the next 10 years.
If you can’t find someone to do this, do your own inspection. Check for cracks, evidence of water damage and the condition of the building. Look at the roof. Have someone go into the unit beside the one you are considering and yell. Have someone tap dance (or bang on the floor) in the unit above. You want to check to see how soundproof the building is (many have thin walls and floors). If there is a unit below yours, see if anything leaks down. Walk around the building and observe the condition of the building. Talk to the other owners. Are they happy with the management of the property? Would they buy again?
I talked a friend of mine out of buying a condo. Instead, he bought a smaller house needing some work. He removed the grass at the back and put in ground cover. He has very little upkeep. He and his neighbours share the snow shoveling. He thanks me every time he sees me. He is slowly upgrading and loves the house. Yes, there are advantages to a condo – someone will mow the lawn, clean the windows and shovel the snow. The exterior of the condo is looked after.
List the pros and cons for yourself. Understand what it is that you are buying. The Canadian Mortgage and Housing Corporation has come up with a guide that is helpful. I realize it’s Canadian but there is a checklist in that PDF that is very useful for your own inspection and would work in any country.
Good luck.
A friend of mine and I were discussing the difference between planning and plain ol’ budgeting. She said she knew a guy who plunked his expenses weekly into a Quicken program and figured he was doing financial planning. Uh, nope. That would be categorized under record keeping.
Here are a few definitions on Financial Planning with their accompanying links:
- In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. …
en.wikipedia.org/wiki/Financial_Planning
- Comprehensive strategy to integrate an individual’s or family’s financial goals, including risk management, investments, tax planning …
www.frbatlanta.org/invoke.cfm
- A coordinated process for identifying, planning for, and meeting goals related to financial needs for individuals, families, and small businesses.
www.woodmen.org/inside.cfm
- A process of money management that may include any or all of several strategies, including budgeting, tax planning, insurance, retirement and estate planning, and investment strategies. …
www.mcgeenet.com/glossary.aspx
Above, I’ve deleted the business-related ones. Essentially, rather than looking into the PAST and what you have spent (which is a good start), you want to plan for the FUTURE. Where are you now and where do you want to be? What are the steps that you need to take to get there? First, you need to know where your money is going. Frugal Village has a great budget worksheet here. But understand the difference. Do the worksheet and then write down your goals. Then write a program so that you can achieve those goals.
I read other financial blog sites. There is a great blog post at Free From Broke - A Personal Finance Blog for Regular Folks.
As one commenter says, “It’s a matter of priority. And being more concerned with LOOKING well-to-do, rather than actually being well-to-do.”
Looks can be deceiving especially when it comes to the Not So Well To Do.
In talking to people, I’ve noticed that there are as many systems as people I’ve talked to.
My brother only pays with cash. No cash, no purchase. For him, it is simple. No credit card debt and he saves up to buy what he wants. He did say that if he can, he’ll pay his car insurance for 6 months or a year and get a discount from that.
I was listening to the CBC Radio here the other day and there was a story on credit cards taking automatic payments from your account. One woman said it had ruined her credit and that the bank also charged her for the overdraft. Yet another woman wrote in an email saying that it worked perfectly for her and she was able to finance everything and pay it off each month. Same system – two different people.
I know one person who puts everything on their debit card and races home and tracks it on Quick Books and notes what kind of expense it is. At the end of the year, it becomes their accounting record. Brilliant.
My step-daughter-in-law told me that she is able to do the don’t-pay-a-cent-for-six-months’ deals. She has bought a number of items and has never had to pay interest and always paid on time. Works for her. Might not work for everyone.
Years ago, a friend of mine would take each week’s income and allocate it on 4” by 6” cards. A certain amount went towards rent, food, insurance, clothing, etc. So she knew that if there was $2000 in her bank account, it was all allocated on these little cards. When she wrote a cheque to insurance, she would then make a notation on the little card. She would accumulate, say, $50 on the clothing allowance and then could go and buy a shirt and deduct from her account and the card. Way too complicated for me but it worked beautifully for her.
I asked my good friend, J, what is her system? She wrote back: “Seriously, it’s really simple — (1) don’t spend more than you make; (2) don’t spend it before you make it; (3) if you have to spend money, don’t be stupid about it. That’s my system.”
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