Saving means spending less than what you earn, and keeping the excess for future expenses. Investing means taking money you have saved, and using it to acquire an asset that earns income or grows in value over time. That asset or investment could be real estate, a bank account, or some other financial instrument. Assets that lose value such as cars or furniture, or that get used up such as groceries, are not considered investments although they are necessary purchases.
Budgeting means planning to use your earnings to pay your necessary expenses including debt, housing costs, insurances, savings and investing. It means knowing how much you have coming in, how much you have going out, and on what your money is being spent. Budget (Merriam-Webster dictionary) defines a budget as: “the amount of money that is available for, required for, or assigned to a particular purpose”.
A budget therefore, is some process of tracking the money you have coming in and the money you have going out each year, month, or week. A budget can be in your head, or it can be on paper or on a computer. Whichever medium you use, a budget is a tool to help you allocate your income to your expenses, and manage your money so that you have enough funds for your needs and wants.
Before creating a new budget it’s a good idea to understand how much money you earn each month and where you are currently spending your earnings. Create a list of the following categories to get started:
Monthly Income: Employment income, Government payments, self-employment income, tips or commissions, etc. after all deductions (income tax, CPP, EI, benefits – we will review in more detail in a future series)
Fixed Expenses: These are expenses that generally happen monthly in about the same amount, like rent or mortgage payments, debt repayment, utility bills and day care.
Variable Expenses: These are expenses that happen each month, but the dollar amount tends to change, like gas, groceries, entertainment, home maintenance, clothing and pet care.
Irregular Expenses: These expenses may only happen occasionally. Examples are car repairs, home repairs, vacations or new appliances.
Savings: Money that is set aside for future expenses which may be planned or unexpected.
To create a budget, you simply list and total all your income for the month,(remembering to use the amount after tax and other deductions as this is the amount you actually have available to spend). List and subtract the total of all monthly expenses and savings combined from your total monthly income.
That is your basic budget.
Are you left with any money or are you short? The budget tool has already worked for you when you reach this point. You can always find these articles on our website www.actionfinancialgroup.com.
Karin Rimnyak, CERTIFIED FINANCIAL PLANNER®
David Dryburgh, CERTIFIED FINANCIAL PLANNER®
Ian Barrie, CERTIFIED FINANCIAL PLANNER®
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.