Having a budget is a great way to reach your financial goals. But a budget will only work if you can stick to it and it’s realistic.
The key components of a household budget are after-tax income, housing, food and groceries, savings, utilities, transportation, entertainment, debt payments, and clothing. Any miscellaneous items can also be added.
Once you determine your monthly income and expenses, and you’ve followed a budget for a couple months, you’ll notice how it can help you get ahead:
Your savings will grow
When you set aside a certain percentage or amount each time you get paid, your savings will start to grow. Planning to put away whatever’s left at the end of every month is likely a recipe for failure. Having an amount withdrawn from your account automatically will keep you on track. The money can be put into a TFSA or an RRSP to maximize your tax savings. Also, making an automatic RRSP contribution will help you avoid missing the RRSP deadline.
You can start out saving with a small percentage of your gross salary. As you become more comfortable with saving, you can ramp it up to 10% or more over time. Let’s assume you make $60,000 annually. If you save $250 a month (5% of your gross salary) and earn a 7% return on your money once a year, you will end up with $292,363.15 in 30 years. If you save $500 a month (10% of your gross salary) and earn the same return, you will have $584,726.30 in 30 years.
You will spend less than you make
While credit cards are a great way to earn rewards, many people get into trouble because they spend more than they make. Even though you’re given a certain amount of credit, it doesn’t mean you should spend that amount every month.
Spending less than you what earn may seem obvious, but many people buy more than they need. Shopping addictions, the fear of missing out (FOMO), low willpower, the belief that something is deserved, and retail therapy are just a few of the reasons why Canadians overspend. A recent Equifax Canada report noted that consumer debt (excluding mortgages) rose 3.3% to $22,837 in the first quarter of 2018.
If your spending is out of control, consider not using your credit cards for a while and use cash instead. This will prevent you from spending more than what you earn. Also, ensure you make more than just the minimum payment on your credit cards to avoid going deeper into debt.
Of if your spending is under control, try using cash instead of credit to see if your spending habits change. A University of Kansas study found when paying with credit, consumers focus on the benefits of the item. However, consumers focus on the cost when paying with cash.
You won’t be as stressed out
A Financial Planning Standards Council survey, which was released in May, found 48% of Canadians have lost sleep because of financial worries. Being stressed about money can lead to a number of symptoms, including irritability, negative thinking, difficulty concentrating, and a change in weight.
According to the Government of Canada, stress can be a risk factor in various diseases, such as heart disease or mental illness. It can also lead to alcohol or substance abuse. That’s why having a budget is good for your mental and physical health.
The bottom line
Living with a budget will help you reach your financial targets and staying on top of your spending is critical to your success. There are a number of apps or software you can use to see where your money is going. Make sure to have some money set aside for fun and give yourself some wiggle room if there are any changes to your situation.