A friend of mine told me that she didn’t think it was possible to travel as much as I do because she doesn’t make a lot of money. Yet she has a better income than mine! What I found funny was that we were having this conversation while she was sipping her Starbucks coffee and eating her chocolatine.
So I did some calculations. This little daily treat costs her about $8 “only”. She was very surprised when I told her that she spent $2,920 ($8 x 365 days) on breakfast on the go because she even went on her days off! At an average tax rate of 25% (marginal 37.12%), it takes about $3,900 in gross income to afford this expense, which is equivalent to one month of her salary.
Is it worth working a month’s worth of time to have the luxury of breakfast on the go every morning? The answer is personal to her and I will never judge her; to each his own.
All this to say that it is essential to make and keep a budget to be aware of our income and spending!
Steps to manage your budget
Here are my tips and tricks for taking control of your finances and learning how to manage your budget.
This is my personal advice, and I am not a financial planner or advisor.
1- Make a budget
Of course, the first thing to do is to write down everything you spend. You don’t have to write everything down to the cent, but you do need to know how much you’re spending in each category. This is the only way to analyze your habits and optimize all those hours spent at work!
It is often the “phantom expenses” such as morning coffee that can surprise us because they are very small amounts. These are piling up and we don’t see the financial hemorrhaging. Once they are identified, you can decide whether or not to keep them, but it will be a well-informed decision!
The large annual expenditures should not surprise us. After all, it’s the same thing every year: Christmas presents, license plates, dental appointments, etc.
2- Have a dynamic budget
Do you know how much money, approximately, there will be in your account in 4 months? In 7 months?
This may be a personality thing, but I like to know what’s coming up so I can readjust. I’m sharing the Excel spreadsheet we use in our family.
Check the Milesopedia toolbox to download it!
This tool allows us to calculate all our cash inflows and outflows over a year.
To use it, just fill it in with your numbers. You can use it as is or as a basis for your own document.
There may be an Excel expert in the room who could help us refine our spreadsheet without having to do this manually, but every month, you have to:
- update your account balance
- set the previous month’s balance to zero on the first line
Knowing if I will be in a deficit in my account makes me want to decrease my expenses and/or increase my income.
You could also turn to a more complete budget management solution with the Educfinance application.
3- Identify the amount to save
This step is very important in my opinion. In addition to points and travel, it’s important to plan for contingencies and retirement. I advocate a balance between carpe diem and retirement; retirement is also my carpe diem… it will just come a bit later!
In my situation, I have several kinds of savings:
- short-term savings for travel
- short-term savings for contingencies (emergency fund)
- medium to long-term savings for my children’s education (RESP)
- long-term savings for retirement (investments, real estate, etc.)
I consider my savings to be an “expense”; that is, I force myself to put money aside as if I had no choice, just as I must pay for my groceries because I have no choice. This behaviour is called “paying yourself first”. Whether it’s $50 or $500 a paycheck, you need to build up your savings and not underestimate the power of compound interest on investments.
Indeed, all savings should be invested in a way that allows the money to grow according to one’s risk tolerance and the purpose of the savings account.
For our family, our short-term savings for travel are in a simple bank account earning 1%, while our retirement savings are in a brokerage account and real estate.
Consulting with an advisor is a good place to start.
4- Establish our priorities
I’m not judging anyone who decides to spend $3,900 of their gross salary on coffee/breakfast if that’s what makes them happy, but you have to be able to target expenses that you can cut back on or cut out if you can’t afford to do something else that’s also important to you.
The main excuse I hear is that people can’t afford to__________. Eliminating phantom expenses and setting priorities are the first steps to doing this.
Good for you if you make enough income to pay for each budget item! For the others, we have to make choices and focus on our priorities.
With a clear and concise budget, it’s easier to target where to cut.
5- Grocery strategy
The grocery budget is often the one we let build up, but it is often the one where we lose the most money in my opinion. I’m not talking about depriving yourself of food, on the contrary! I’m a foodie and I love eating! In fact, it is my second passion after travelling!
What I mean is… food waste. I find it absurd to throw food, and therefore money, in the garbage.
For optimal grocery shopping:
- take inventory before leaving for the grocery store (refrigerator, freezer and pantry)
- check the circulars
- think of recipes according to the specials
- make a grocery list
- before you check out, check your cart in case you have consciously or unconsciously added items you don’t really need (don’t go grocery shopping with the kids)
- and of course have the best credit card for groceries
Planning, execution, cross-check.
Think about it… are you aware of everything in your freezer or is there a frozen lasagna that you forgot about 6 months ago? Did the bananas you bought two weeks ago end up in the belly or in the garbage?
6- Integrate credit cards rewards points
These two statements are the real game-changers in my case:
- Credit cards allow me to earn travel points or reward points for travel.
- Credit cards allow me to earn cash back on my everyday expenses, lowering my cost of living and increasing the funds available for travel.
This has allowed me to travel five to seven times a year for the past decade. In my previous article on credit card management, I said that it was better to focus on one or two programs when you are a beginner in order to first master the programs.
Over time and depending on the number of programs mastered, you will build the points and rewards into your budget!
Thanks to AIR MILES, many everyday items as well as Christmas gifts for the kids end up being almost free every year.
The same applies to the travel budget. I have been earning Aeroplan points for over 10 years so I know my average annual earning rate.
Since I know how many airline tickets I can afford with the points I adjust my travel budget accordingly.
7- With friends, couple or family
There is strength in numbers! I’m not telling you anything new when I say that many expenses are reduced when you’re in a couple (or in a shared apartment). On the points side, the earning and use of two or more players is the most lucrative.
In a family of four, what better way to save on the kids’ airfare than to each apply for a credit card with an Air Canada buddy pass.
My parents and I often share expenses like buying the 5L of Ketchup at Costco or buying three packs of paper towels to get a better price (and bonus miles)!
These are savings that can go a long way as they île up, and everyone’s budget shrinks!
So think of your friends, your parents, your spouse to help each other save and earn points!
One thing I’ve often noticed is that people tend to make excuses for their problems.
My philosophy is to find solutions and bring them to the forefront. It is also through this kind of effort and mentality that life will be easier. If you are convinced you will run out of money, this will become your reality.