Sands & Associates’ Vice-President and Bankruptcy Trustee Blair Mantin appeared on Vancouver’s Breakfast Television to share tips on how viewers can create and maintain a successful budget.
Why is a budget important?
Less than half of Canadians operate with a budget on a month-to-month basis; it can be very difficult to make financial headway like this – it’s like “driving blind”, with no ability to course correct and know whether you are trending positively or negatively.
The biggest mistake people make in budgeting is to never track actual expenses against their estimates – if you don’t revisit your budget every month, you don’t really have a budget.
Key budget areas and percentages (percentage of after-tax income):
Housing – 35%
35% is the upper limit of what most experts would recommend in a monthly budget for housing costs (mortgage or rent plus all utilities).
The challenge is that living in Vancouver it can be difficult to meet even this target of 35%, with many people spending more on rent and mortgage than they would have to if they lived elsewhere. Options such as hosting homestay students, or considering a roommate can help to reduce this cost. Be careful if you consider moving that additional transportation costs do not offset any savings in housing costs.
Transportation – 15%
Consider all of the costs of owning a car: Gas, insurance, maintenance and repairs, depreciation, etc. BCAA estimates that the average compact car costs about $9,500 per year.
This is another area where overspending is common. Most of us greatly underestimate how much it costs us to get from point A to point B. If you’re able to use transit, you’re ahead of the game as it’s near impossible to spend more on public transit than you would spend if you owned a car. Is 2015 the year to embrace car sharing? Options abound in Vancouver for short trips, long trips and everything in between. Consider Car2go, or Modo Car Coop as good, cost effective options.
Food and Other Living Expenses – 30%
Food costs can vary widely depending on your diet, shopping habits, affinity for couponing, and size of your household. A good estimate is about $250-300 per household member for groceries each month.
We’ve all felt the increase in food prices lately; according to StatsCan, inflation in food in 2014 was dramatic, with meat, fish and vegetable prices all increasing in the range of 5-12% over last year. While you can’t do much about the increased cost of ‘staple’ items, this category also includes some budget killers like eating out, lattes, taxi rides, nights out, etc. The key is to track this category accurately – consider whether an app could be helpful, or even try ‘giving yourself an allowance’ by putting money in a separate account for food and other living expenses each month.
Savings – 10%
You must pay yourself first, by setting up automatic withdrawals into an account. Otherwise, there will never be enough money left for savings.
Saving money is usually the first thing that goes to the wayside when money is tight. It is also hands down the number one factor that will determine whether you will achieve financial success – can you save money each month? RRSPs are the only funds that are safe no matter what, so even if you aren’t debt free, you should still be making contributions to your future.
Debt repayment – 10%
90% of Canadians say they have more debt today than five years ago. Top priority for 2015 is to pay down debt according to a recent study by CIBC.
Many people fall into a trap of ‘financial tetris’ where they are using one card to pay another. Though they might feel great about taking action on their debts, they may not be getting any further ahead if they are just shuffling money around between cards. Consider how much money 10% of your income is, if you’re required debt payments are much higher than that amount, you should investigate whether professional debt help is required.