Your Financial Snapshot Shouldn’t Have Filters

In the past few months, most of us had a summer vacation, a back-to-school, maybe a renovation project, some birthday parties or other events that usually cost a pretty penny. We love to have memories of these fun times; we’ll even take a selfie to remember them forever. But many of us don’t have a snapshot of our current financial situation. What do you think yours would look like?

Budgeting is Important

In recent years, studies have found that an average 4 out of 10 people don’t budget. Even worse, 70% of the younger segment of our population (under 34 years) don’t make a budget, or if they do, they don’t keep to it.

It’s not surprising so many feel the burden of financial strain. Fortunately, several organizations offer a variety of free tools to make a budget with minimum effort.

Is Budgeting Easy?

Making your budget is easy; facing the reality of your current situation, not so much. However, the trickiest part is maintaining the discipline to actually follow your budget.

Budgeting consists in planning your future expenses and sources of income. However, more often than not, we end up overestimating our income and underestimating our expenses. Oops!

Ask yourself the right questions: what are my actual sources of income? If you’re in a relationship, it’s important to see the whole picture and be realistic when evaluating your situation; you need to take all components of your finances into account to produce an accurate budget.

The same goes for your expenses: underestimating these will quickly result in a deficit at the end of the month. Again, the key to a successful budget is asking yourself the right questions and being honest with yourself when you answer these.

Step 1: Your Balance Sheet

Remember that snapshot we talked about earlier? Now is the time to take it, meaning your need to assess your financial situation to have an idea where you stand. This is called a balance sheet.

This assessment consists of deducting what you owe from what you have; the results will tell you the extent of your debts. Once again, honesty is key; lying to yourself is quite futile in this situation!

Start by listing your assets. This is what you own, such as a house, car, furniture, etc. When it comes to your home’s value, ask yourself how much you think you would get for it if you sold it tomorrow. If, like me, you’re clueless when it comes to real estate, go for a smart guess by having a look at the market and basing your estimate on your municipal taxes.

Next comes the car: remember, cars lose value quickly. If you bought yours for $20,000 three years ago, it obviously won’t be worth as much today. To determine its current value, take into account a 30% depreciation factor per year—in this case, you’d be looking at a $6,700 value. You could also check out the Canadian Black Book for a more precise idea on how much a car dealer would give you for your vehicle or how much you could ask from another buyer.

As for your other belongings, especially furniture and appliances, go with an estimated value based on how much they would be worth if you sold them today, not on how much you paid for them back in the day.

Next step: your debts (liabilities), including your mortgage, balance in credit cards, other debt securities, etc. Once you’ve written it all down, your balance sheet should look like this:

According to the numbers used in the example above, your net worth would total $66,300. This means that unless you had to face some big surprises in the future or deal with some unexpected expenses, you should have no problem meeting your financial obligations.

Your Budget

Now you have to determine the best way to repay your debt while meeting your monthly obligations. I recommend you make a budget every month, and that you include your different sources of income and the main expenses you will have to cover.

Your income should include your salary, any investment income you’ll receive, and income earned from other sources. I strongly suggest making your budget based on your net income (after tax and other payroll deductions), because let’s face it, you pay your groceries with what’s actually in your wallet, not with your gross income!

Your expenses should have a separate entry for each of your obligations, whether your mortgage, credit card payments, car loan payments, municipal and school taxes, utilities, telecom, groceries, etc. You should plan for the unexpected by saving around 5% of your net income for a rainy day, and add a “Savings” line to your balance sheet. Experts recommend putting aside between 5 and 10% of your net income and suggest that you save the amount of money you would need to meet your obligations for at least 3 months if you ever found yourself in a difficult situation.

Your budget is balanced and you have some extra money? Why not invest this amount in a TFSA to save a little extra money for your future, for a trip or for a personal project? If you have children, you could even put some money into a registered education savings plan (RESP).

It’s Holiday Season

With the holiday season right around the corner, I always recommend making a sub-budget within your monthly one. There’s still time to make a list of everything you want to buy and determine the total amount you intend to spend. And start early! Waiting until the last minute will likely lead to impulsive and costlier spending. Finally, play it smart and save big by taking advantage of the sales offered both online and in stores. This tips should help ease the shock when those January credit card statements inevitably roll in.

Happy Holidays!

Need help making your budget?

Assess your situation with Raymond Chabot:
https://www.raymondchabot.com/en/individual/assessing-your-situation/how-to-evaluate-your-debt/online-budget/

Or make your budget online:
https://jeanfortin.com/en/tools-and-tips/online-budget