As its name suggests, this column is about money. Specifically, we’ll be looking at personal finance, investing, and the market and economy. In this first instalment, we’ll talk about the most fundamental concept of personal finance: budgeting.
The first step in creating an effective budget is to list all of your income and expenses in a typical month. For expenses, I recommend categorizing them as “essentials” (things you need, such as housing, utilities, groceries) and “non-essentials” (things you want, such as streaming subscriptions and those new Adidas sneakers).
With your list, decide on how you will apportion your monthly income amongst essentials, savings, and non-essentials. Start with the essentials, as these are generally fixed. With the balance, decide on the dollar amount you want to save. A good guide—although not always possible—is to save at least 30 percent of your monthly income. Whatever’s left is your non-essentials budget. It’s a good idea to make the savings portion a “hard” target, meaning if you ever find yourself exceeding your essentials budget, make up for the shortfall from your non-essentials budget. This way, you continue to save the same amount monthly.
Now that you have yourself a shiny new budget, it’s time to put it into action. To ensure that you are keeping to your budget, download an expense-tracker app and diligently record your spending in correct categories. There are plenty of such apps available, so play around with a few to see what works best for you. Personally, I have been using the free AndroMoney app on my Android phone for years. It’s a lightweight app that provides great statistics on my spending.
Be sure to separate your savings from your regular chequing account. This helps you to avoid temptations. I suggest opening a higher yielding savings account with an online bank. These generally come with no fees, higher interest rates, and your money remains accessible should you ever need it.
Compare your budget with your actual spending every three to four months. Perhaps you’ve overestimated how often you visit restaurants, and find that your non-essentials budget is too large. Great—you can increase your savings percentage. Alternatively, record how much excess you have each month, and treat yourself to something luxurious sometimes.
This is just a general guide, and you will need to tailor it to your specific financial situation. You may find that saving 30 percent of your income is difficult. No problem. Start with something manageable, and find ways to increase it by reducing some of your non-essentials spending.
Remember, saving a little is better than saving nothing, and it’s never too late—or too early—to start.