For a personal finance site, I haven't had much discussion of the all-too-familiar budgets. It is the basic building block of all things finance, because it ultimately describes money coming in and money going out. So, why has it not gotten much attention?
From what I've seen of budgets, they appear to require some fairly accurate estimates on the user's typical expenses, and focus on ensuring expenses are less than income, and simply that. There's nothing wrong with ensuring expenses are less than income, but as I alluded to in my second article, you open yourself up to the psychological trap of having a more expensive lifestyle as your income increases.
Let's take a look at the solution I've come up with to these typical budgets - one that is dynamic and can help you achieve financial milestones. Download it below:
The Excel workbook is divided into 3 tabs:
- Expenses - Enter your actual monthly expenses for each category here.
- Income - Enter your actual monthly income here.
- Summary & Savings - See a snapshot of your money and plan your savings.
In the first tab, there are columns for each month throughout the year that you can enter your actual expenses into. The reason I have laid it out in this way is because some expenses can be sporadic over the course of a few months, and this makes it very hard to estimate (one of my gripes with typical budgets). Examples might be travel expenses or tuition for school, and these tend to be fairly big-ticket items that should be considered in your month-to-month planning. It is important that you only fill in numbers for months you are averaging, because the formulas to calculate the average will do so based on the total number of months you have provided information for. For months you have populated, any blank cells will be treated as a zero, so ensure you include every expense.
All expense categories can be renamed to suit your specific situation - so don't be afraid to go through and make it as detailed or as summarized as you would like. There's also no effect if you simply leave entire categories blank. The default categories I have included are good questions to initially ask yourself, and if they never apply, at least you know you aren't missing something. It's important that you count interest on loans/lines of credit as an expense, too. Once you have populated the table with a few months worth of good data, you can see how your monthly expenses have changed, and get an idea of very accurate averages in the "monthly average" column.
The income tab is laid out very similarly to the expense tab, but with fewer rows. Not because I'm advocating for limited sources of income, but because, realistically, most people will only ever have a handful of sources of income.
Finally, the summary and savings tab gives you a very wide overview of your average monthly income and expenses, with the goal of showing you how you can maximize your savings, and do so in a sensible heirarchy. The top "vehicle" for savings is the TFSA (read more about TFSAs here) for Canadians, and as such, should be maximized first. Keeping time on your side for an easy retirement is what I consider the second highest priority, through an RRSP.
You'll notice that the rainy day (or emergency) fund is third, which seems like an a low spot for something that most would say is extremely important to have. But, the flexibility of TFSAs allows it to act as a temporary emergency fund as you take the time to fill up your tax-sheltered accounts before having a specific rainy day fund. Just make sure you have some liquid assets within your TFSA that can be sold in short order. Finally, any "spillover" can simply be invested in a non-registered account, which will incur taxes from both capital gains and dividends/distributions.
To cater the savings heirarchy to your situation, you will have to enter your current account values in column F, which is used to calculate appropriate monthly contributions to the savings accounts. The last piece that needs to be entered by you is cell G3, where you will put your total TFSA contribution limit. If you need help figuring out that value, refer to my article on TFSAs.
With these pieces of your financial situation coming together, the first pie chart shows your percentage of income that being saved, broken down by account. The second pie chart shows the percentage of your total savings, broken down by account.
You can now take your income and accurately allocate appropriate portions to different savings accounts, knowing you have considered your real spending habits, and see your savings grow over time!