For this first time round, I want to harken back to something extremely important: savings. There’s a rule in personal financial planning that says we should systematically save about 10% of our net income right away, yes, yes, you’ve read correctly, now, today!). 

Whether it be for retirement or to constitute one’s emergency fund for 3 months, don’t wait! In fact, the longer we wait before saving, the greater the risk you’ll have of making big sacrifices later on, which will surely entail a reduced lifestyle.

I recently read an extraordinary book, one of the rare ones on personal finances in French, written by David Chilton, one of the “dragons” on the show Dragon’s Den in Canada. It’s called “The Return of the Wealthy Barber”.

The author struck my imagination by reinventing The 10% Rule. Considering that few amongst us actually save sufficiently, but we’ve rather mastered the art of spending, he suggests an original way to attain our goal: save only 4% of our salary, but cut 6.25% of our spending. Admittedly, this seems a lot more reasonable! We just hadn’t thought of it before…

What’s most surprising is that this approach (that he explains in detail) increases the rate of savings by 150%! Pretty awesome, wouldn’t you agree? A new way of tackling it all; perfect for those who are more inclined to reduce their spending than saving their money!

However, life will no longer be easy: cutting 6.25% of your spending demands discipline and restraint. To put chance in your favor, limit your access to credit: destroy your excess credit cards or those from big chain stores and be conscious of your spending by identifying where your money’s going. You’ll be surprised to notice at what point the additional spending on one thing to another can quickly add up to unexpected amounts.

As for you, where will you cut your 6.25%?

Yves

Before plunging into the making of a budget, whether it be through Budget Express or on paper, there are a few things that are unavoidable.

First Rule: Before starting, gather all pertinent papers. Bank and credit card statements are especially useful for tracking spending and recurring income.

Second Rule: Always remember that a budget is a continual process that is refined over time! Despite all the care you might put into planning it, a budget will always be modified as you go to adjust to reality. Thus, our planned budget is different from our actual budget. Here’s an article that explains this topic in more detail.

If you use Budget Express:

A. Start the software, then click on Create a new budget.
B. A window will ask you to assign a name to your budget and select where you want to place it. Click on OK to continue.
C. The Set Up Wizard guide you through the 7 steps. You will always be able to add, modify or delete the entries and operations later.

1-Presentation:
A quick filler about what’s to come.

2-Profile:
A few questions are asked to determine the entries that match your personal situation.

3-Other accounts:
Skip this step if you’re in a hurry. You’ll be able to manually create other accounts later, if needed. To go to the next step, click on “Next Step” on the bottom left of the window.

4-Income:
Identify your sources of revenue.

5-Fixed spending :
Enter the amounts according to the entries chosen.

6-Variable expenses:
Go ahead and round things up or down… estimate! (ou Feel free to “guestimate”.) Think of your priorities; the rest will be adjusted later.

7-Conclusion:
Indicate the starting balance of your account (or accounts if you created others in Step 3).

 Note: some options located on the bottom left of the Assistant window allow you to activate or deactivate the voice instructions.

 
And voilà, your budget is ready! See the different entries on the left of the screen, classed in the corresponding sections (Income, Fixed Expenses, Variable Expenses, etc.)

Forgot a few operations?
1. Find the entry corresponding to the list on the left, then click on it to make the change.
or
2. Right-click in the box of the calendar corresponding to the day of the operation, choose “Add an operation”, then follow the steps on the screen.

Want to modify a planned operation?
1. Find the expense entry corresponding to the list on the left, then click on it to make the change.
or
2. Right-click on the appropriate operation in the calendar, choose ‘Modify the operation’, then follow the steps on the screen.

Did you forget an entry?
Simply look to the left of the screen for the ‘Add an entry’ button.

Why a planned budget?
Making a budget starts by examining past spending in order to better predict future expenses so that we can more easily attain our financial objectives. It’s what is called the planned budget, and gives a global picture of money coming in and going out.

To prepare the planned budget:

Step 1: Identify your income and expenses
- List all your sources of revenue. Don’t forget income such as pension, alimony, rental income, etc.
- Make a list of your biggest monthly expenditures: 100% fixed costs, and about 80% of variable costs (others can be added later).

Step 2: Set your priorities!
We all have different priorities. What are yours? We recommend that you add to your list:
- Mandatory expenses (rent, transportation, public services, etc.)
- Emergency savings equivalent to 3 months of salary
- Automatic retirement savings
- Identify what you value most. The purchase or renovation of a home, a chalet? A new car? Yearly vacation? Saving for your children’s education? Always having money for hobbies? A golden retirement?

Step 3:  Assign a monetary value to your priorities

Establish the necessary amounts to each of the points in Step 2 and compare them all to the monthly total revenue (net). If the amount that you can save is weaker than you were hoping, cut back on spending or revise your projects according to your capacities.

You will see before your eyes your planned budget, meaning your short term financial objectives.
With Budget Express, the planned budget is prepared with the help of the assistant that automatically starts when you create a new budget. Just follow the steps on the screen.

Why a real budget?
When your planned budget is well put together, you can begin comparing it to the reality and see if it holds out, or if any tweaks (adjustments) are necessary.

To achieve this, at least once a month, write down in your budget the expenditures that you made. With Budget Express, you can do it manually or by electronically importing your bank statements.

How to do this?
Manually right-click on a calendar operation, then click on “Modify operation”. Check the box “Compare the amount planned with my actual expenses”, enter the actual amount, then click “OK”.

How to do this?
Manually right-click on a calendar operation, then click on “Modify operation”. Check the box “Compare the amount planned with my actual expenses”, enter the actual amount, then click “OK”.

By importing your bank statements (what’s referred to as “bank reconciliation”), everything is done automatically as written on this article. “Bank Reconciliation with Budget Express: Easier than you think”

Go to the “Details” tab, then click on “Compare”. You will automatically see the list of your income and expenses, both planned and actual.

As needed, you’ll be able to adjust your planned budget for the next few months in order to follow through with your priorities!

Be Prepared

Ensuring one’s financial security is not the result of chance and doesn’t happen by itself. Some people rely on the government for a smooth-sailing retirement. With the economic health of our ministries (or lack of), you ought to forget this notion. In fact, in the same way that companies develop their famous 5-year plans, why not apply the same plan to our personal finances? Recording our financial objectives must be written down in a plan. This formalizes everything and ensures reaching our goals. Success rarely happens by accident… so have a plan!

Develop Your Skills

Without doubt, it’s the part that turns us off: we like delegating the management of our finances to others. However, we’re ready to travel a good distance to save $100 on our new fridge. So why such an attitude? The expression: “We want your well-being… and we will have it” is often appropriate. In this case, how can we remedy this?

You owe it to yourself to acquire minimum competencies in this domain. Understand what others propose to us and try becoming independent. Whether through training, reading, or computer apps, attempt to develop your skills and interests. Stay informed and invest in yourself. It will surely bring you greater satisfaction

Cash is King

Ever heard this expression? “Cash is King”, that’s for sure, as he who pays his debt grows richer. These mottos confirm that one must distance oneself from passive and bad debts. Managing your debt is the ultimate exercise to attaining financial success. Stay within your means when buying and pay off your debts as quickly as possible. The order of the day is to avoid overconsumption. Easier said than done, isn’t it? Paying interest on goods that decrease in value goes against logic. Indeed, the secret of the successful is spending less than you earn.

Obviously, certain debts such as the purchase of a house or student loans to earn a better living are reasonable, but still, we must not go overboard with our ambitions and respect our repayment capacity.

Patience Required

Even if you’re armed with a plan, unforeseen events can arise. Job loss or bad investments can occur. In my case, my job was at stake last spring. Nevertheless, I focused on my objectives and stuck to my plan. The result? After some scrutiny, I kept my job. I maintained my ambitions and everything fell into place, finally, as it should have. Not letting small, temporary problems distract you from long-term objectives is truly the key to success. There’s a word that is easy to write, but hard to say. Cry it out loud: PATIENCE!

Adopt these four criteria in managing your finances and your future will be assured. The road will be long, with dead ends and pitfalls, but it will be an exciting journey, I can assure you.

Obviously, remember to enjoy life and reward yourself a little; you deserve it!

This article is from Mathieu Lajoie, author of the blog : Comprendrevosfinances.com

User Profile
Woman, 38 years old, programmer/analyst, owns a semi-detached house, lives alone, has a recent car that is completely paid, does contribute to a RRSP on a regular basis, considers her debt ratio to be low.

Why make a budget?
Like many people, Sylvie keeps a budget mostly to make sure she only spends money she really has. Since she lives alone, she must assume all the costs associated to her residence, in addition to other living expenses. This requires a lot of control. Sylvie wishes to maintain her debt ratio as low as possible and manages to avoid unnecessary loans by carefully planning her savings through BudgetExpress.

How she uses BudgetExpress
Sylvie has managed her personal budget with BudgetExpress for years. She updates it at least once a week and makes sure all scheduled operations correspond to reality. If there are any changes to make, she enters them manually in the calendar. However, she admits this does not occur very often because she knows her budget by heart!

Finally home, thanks to BudgetExpress!
A few years ago, when she finally got a job that was paying enough to start making projects, Sylvie began to dream about leaving her apartment and live the life of a home owner. This meant buying a car to facilitate transportation and planning all the costs associated with buying a house. She decided to use BudgetExpress to build financial scenarios in order to know what were her realistic options.

Now, she is the proud owner of a small car and a nice semi-detached house. Everyday, she enjoys what this life change has brought to her. “I have my own land corner and I can see the forest behind my house. It’s quite a change from the city concrete!”

Little by little, she continues saving money and improves her living space to her very own taste…

Audrey Miller audrey@amtice.com

Budget Express provides a practical calculator that enables you to see the benefits of this operation.

Here is an example. Let’s suppose you make monthly payments on a $200,000 mortgage over 25 years at 4% interest.

1- Start Budget Express and choose, from the Tools menu, the Loan Calculator.

2- In the Estimate menu, choose « duration».

3- Type the remaining amount on your mortgage next to Original amount (in our example, 200,000), and the interest rate next to Annual rate.

4- Type your monthly payment in the following box (ex.: 1055.67), then click Calculate.

5- At the bottom right of the window, you can see the cost of loan. In our example, it is just a little over $116,700 (if no parameters change over time, of course!).

Now, imagine you can make a $5,000 extra payment.
6- Change the Original amount value by removing 5,000 (which becomes $195,000 in our example).

7- Click on Calculate again and see the effects on the cost of loan.

In our example, we can save about $ 8,723 in interest at the end. If you repeat this every year, the savings will become substantial. As a bonus, if you don’t change the amount of your monthly payment, you will repay your loan much faster!

To make such simulations, start Budget Express, go to the Tools menu and select the Loan calculator. It allows to simulate various parameters such as monthly payments, term or borrowing capacity, in addition to seeing the interest you pay on a loan.

If your financial situation requires you to follow your budget very closely, the credit follow-up function could be very useful. To take full advantage of it, you must have a credit account, for example a credit card. Each time you purchase something using the card, you enter an expense in Budget Express and specify the method of payment. As it is a credit purchase, the effect is not immediately visible in the calendar view and the amount is indicated in gray.

To view the follow-up:
1. Find the Credit section in the list on the left of the screen, then click on the credit card you want to see.
2. In the pop-up window, click on the Follow-up tab.

You will see each planned operation and the card balance for the past days and for the future. You can also manually adjust the balance for a given day.

A user of the software explains: “I make frequent payments on my credit card. It may take some time before they are registered as such on the online services of my bank. Budget Express allows me to manage this more easily. Also, I can see which credit card will be repaid first, so I know which one to use for the unexpected. This is reassuring and encouraging! “

“Abnormally low interest rates have allowed the ability to manage these high levels of debt relatively well, until now. But the Governor of the Bank of Canada, Mark Carney, has warned Canadians that they should exercise caution with their credit applications, as interest rates are going to reach ‘normal’ levels, sooner or later”, as stated by Michael Gregory last December, senior economist of BMO Capital Markets.

Speaking of indebtedness, it’s through awareness that the recovery process starts, and for some, that time has already come. Desperate times call for desperate measures!

Warning Signs that Indicate a Debt Too high

1) Obtaining an advance from one credit card to pay the balance of another, or worse, only paying the minimum required. A handy method of payment, the credit card is only beneficial to you if the entire balance is paid monthly in order to avoid the almost usurious rates charged by financial institutions.

2) Repetitively paying just the minimum amounts on credit cards. Having a significant balance to pay on your credit cards is often a sign of financial incapacity and occurs when faced with unforeseen events or some of life’s blows. In the same line of thought, using credit to “finance” the acquisition of basic goods, such as food, clothing, medication, etc., indicates financial constraints that should not be lightly considered.

3) Late payments on rent or mortgage, or if you’re incapable of paying for public services before the due date. A call from a collection agency should sound the warning bells loud enough to summon you to action.

4) Certain lines of credit (mortgage or not) and adjustable mortgage rates are particularly sensitive to the fluctuations of interest rates. An increase, even small, could have an impact on the monthly budget of property owners who have borrowed beyond their true repayment capacity. This is also what Philippe Ventura, CFA, President and Chief Financial Security Advisor at Chevalier, Meunier & Associés explains in his most recent French post “If you have a mortgage of $250,000 payable over 20 years, are you prepared to be subjected to a monthly increase of $276.13 in your actual payments in the event that the interest rate will climb up 2%?” he asks. Actually, if you feel suffocated by reading just this paragraph alone, it’s perhaps a sign that your level of debt relies more heavily on the family budget than you realize.

5) Monthly payments so high that they rule out any possibility of savings are yet another symptom of excessive debt.

Steps to Getting Out

1) Nothing better than starting with good ol’ Excel, listing all debts you’ve incurred in detail. For example, the first line could be “Installment plan purchase, ABC Furniture Store, remaining balance $6,000, 18% interest rate, $300 monthly payment, deadline in 16 months.” Each debt, including credit cards, should be indicated in this manner.

2) A plan of attack. This is where a software application like Budget Express becomes essential. Here, the objective is to determine the monthly amounts available to channel them towards reducing overall debt. The first thing to consider is the immediate budget reallocation to prioritize debt reimbursement with the high interest rate.

3) The monthly debt that has finally been paid must be directed towards the repayment of a second debt written on your Excel spreadsheet.

4) Along the way and subject to good credit, debt consolidation should be considered. Obtaining a financial loan or line of credit at a better interest rate will allow you to accelerate paying off your various financial obligations, especially those with high interest rates, thus limiting the number of repayments coming from left and right.

5) An highly indebted person must consider all the possible solutions to rid himself of financial burden. Selling real estate property or personal goods, for example, can quickly bring to end a debt that weighs heavily on one’s budget.

6) Once the debt situation is controlled or is on its way to being resolved, it would be wise to partner up with a financial service professional. In the French text “Consult an advisor, it pays off” published by Conseiller.ca, the reader can take note of the words of Charles Sims, President of the Investment Funds of Canada, bringing attention to the “advisors who improve the financial knowledge of their clients, encouraging them to develop a savings and investment mentality, and assisting them in developing a financial plan,” he explains.

Ideally, no one wants to have a voluntary deposit, a consumer proposal, or worse, bankruptcy. A rude awakening partnered with quick action can often prevent one from losing the shirt off one’s back.

DOMINIQUE LAMY
Follow me on Twitter: @domlamy
Subscribe to my Facebook profile: Facebook.com/DomLamy

PRISCILLA BIJU THEN (French-English Translation)
Follow me on Twitter : @PriscillaBiju
Email: priscilla@bijucreative.com

User Profile
Man, 36 years old, parts finishing trainer, owns his house where he lives with his life partner and their 2 children (9 and 10 years old), has no investment other than RRSP, considers his debt ratio as average.

Why Make a Budget?

Jean had never make a budget before. He liked to spend his money and enjoyed the good things of life without thinking too much about the future. That was before a motocross accident happened to him, shortly after completing major home renovation. This event was a trigger for him. He realized that his disability insurance did not pay enough to maintain his lifestyle, and he could not bear to pay interests on his credit card. “That’s money down the drain!”, he says. He then resigned to budget responsibly. And, finally, he’s loving it…

How He Uses Budget Express

Jean began to build his budget with Budget Express software about over a year ago. With its ease of use and as he had time since he was off work, he began to exploit the software as few people do. Indeed, he uses it to maximize the rewards that can be obtained from different credit cards. To achieve this, he is the treasurer of a strategy involving family and close friends. “We are a few using the same cards to draw all the benefits we can. For example, some credit cards give interesting rewards if you spend big amounts monthly. Then, to make sure everyone pays his or her share, I closely monitor the transactions. For instance, I write who owes how much in the credit details.”

Jean keeps an eye on the graphic that shows the annual evolution of the account balance. “It has to go up! Otherwise, it means there is an error somewhere in the budget that must be corrected! ”

Thanks to Budget Express…

Jean quickly regained control of his finances with his budget. He is now planning a trip to Cuba. “I enter the expenditure in the month of January, even though I know I will travel in March. That way, I’m sure I will have enough money available when the time comes”, he says.

Audrey Miller audrey@amtice.com

First of all, you can do it manually. You add up the amounts for each expenditure item, such as “Clothing” and “Grocery,” and you enter them in your calendar according to the planned operations.

If you use the bank reconciliation, here’s how to achieve it.

1. Open your bank statement in bank reconciliation mode. (For more information, read the information capsule Bank reconciliation.)

2. Select the superstore expense in the list on the left of the screen, and then the icon of the Clothing operation in the calendar.

3. Enter the portion of expenses related to clothing, then click Reconcile.

4. Reselect the superstore operation in the list on the left of the screen, and, this time, the Groceries operation icon in the calendar.

5. Enter the portion of expenses related to groceries, then click Reconcile.

You’re done!

Audrey Miller audrey@amtice.com