Budgeting 101 – Part 1 of 5
The following article by Robert W. Powell, CPA CA CIRP LIT, was published in a November issue of the District News.
If you want to make a budget, you need to understand your expenses, short-term, medium-term and long-term. When I think about life’s expenses, I break them down into 4 categories.
- Monthly- these can be fixed or variable. Fixed expenses can include rent, mortgage, car loan, insurance, cable, telephone, internet. They are pretty much the same every month. Also included here, for the planners, might be regular RRSP and RESP contributions. Variable monthly expenses may include oil, electricity, cell phone, vehicle fuel, food. These types of expenses generally occur every month but may have some variability as to amount. Some are seasonal in nature such as heating.
- Annual - some are fixed and some variable. We know that we are going to incur these expenses and may know roughly when they are going to be incurred but not necessarily how much they will be. Think of the annual vehicle inspection and registration as fixed. The variable component would be the cost of repairs in order to get the inspection completed. Also included here would be Christmas and birthday expenses, and perhaps annual vacation expenses.
- Lumpy - these are expenses that we know (or should know) are coming down the track and will have to be incurred but only happen once in a lifetime or only once every couple, few, 5, 10 or 15 years (or so). Examples of these types of expenses include new tires for your car, helping your kids fund their post-secondary education, children’s weddings, significant dental or other medical procedures that are not covered by insurance, significant home expenses (roof, windows, siding, septic, well). Lumpy expenses might also include goal expenses such us a down-payment for a house or cottage, the dream vacation or buying a car for cash.
- Catastrophic- these are the really nasty ones. You don’t see them coming and the impact can be financially crippling. Examples include uninsured or underinsured damage to your house or vehicle, non-covered medical expenses / medication, litigation costs. I would also include here the implications of loss of income where employment or level of income cannot readily be replaced.
The first 3 categories of expenses can be budgeted and planned for. The last category of catastrophic expenses cannot be planned for but, measures can be taken to lessen or mitigate the impact of these expenses.
Understanding these categories of expenses is the first step in budgeting and I am going to talk about these categories and what you should consider in subsequent articles (4 more parts). In the meantime, try to break-down your expenses into these categories and start to think about the Monthly, Annual and Lumpy expenses in your world.
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