Budgeting 101 – Part 2 of 5

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The following article by Robert W. Powell, CPA CA CIRP LIT, was published in a November issue of the District News.  In Part 1 of this series, I broke life’s expenses down into Monthly, Annual, Lumpy and Catastrophic expenses.  In Part 2, I am going to deal with monthly expenses.

Monthly expenses should be the most predictable of the expense categories.  They happen every month.  Some are fixed and some are variable.  With your household income, you should be able to comfortably cover these expenses including covering seasonal variations.  If you have nothing left over at the end of the month after paying monthly expenses, then you have no money to deal with the annual and lumpy expenses.  This is not a good situation.

Required monthly expenses are food, a place to live and transportation for work so you can earn income.  This is basic living.  Each of these expenses have a broad range of cost depending on how you manage them.

For food expense, if you plan and cook your own meals, shop for bargains, use leftovers for lunch and stay away from pre-packaged and prepared foods, you will likely have the lowest cost for food.  If you eat out a lot (including buying coffee and lunches), buy pre-packaged and prepared foods and give your kids lunch money instead of lunches, you will be at the higher end of the monthly food cost range.  If your food management falls in the latter description, this is one of the easier areas to quickly reduce the monthly cost.  You need to change things up but, you can do this quickly and have an immediate positive impact on your expenses.

Living and transportation expenses can be more challenging to manage.  The key here is to not get into too large of a commitment in the first place.  Once the commitment has been made, it can be difficult and take a long time to manage the cost to a lower level.  In the interim, your finances may be stretched.  For example, buying a high priced vehicle when a lower priced one would do.  As the axiom goes, the car is worth 20% less as soon as you drive it off the lot.  So, if it is a fully financed or leased vehicle, it will be very difficult if not impossible to get out of the obligation once committed to.  Buying a vehicle is a significant decision that should not be made quickly and must be well thought out.  Be disciplined, take the emotion and impulse out of the decision and focus on the practicality; what do you really need for a vehicle and then what are the cost options for such a vehicle.  The same goes for living accommodations.

Having cash left over after paying your monthly expenses is very important to effective financial management of your life and, it will give you great peace of mind.  Maybe you won’t have what the Jones’ have but you will sleep better at night.

At Powell Associates Ltd we are a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses.  We offer free consultations to review your personal financial situation and offer practical debt resolution options.  Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.