This is my 3rd article in March 2005. It was my first article on this website, and it still seems to fit the test of time (so many years later). Have a read. Can it really can be that simple (if you let it)?
So the first and most straightforward concept of financial planning is to SPEND less than you MAKE. This is so obvious that maybe it gets obscured with the odd plans and peccadilloes we put together in our financial lives. Let’s look at this as the fundamental equation:
Incoming cash - Outgoing cash = SAVINGS (or Losses if negative)
You are probably thinking, I know that one! Really? Do you know how much money comes into your household? It’s not too hard to figure out. If you keep your pay stubs, but the rub is, how do you figure out how much is going OUT of your household? Can you figure out where you are spending most of your money? Can you guess? I bet you might be able to guess about it, but I have also found that you might be wrong.
I am part of the “Quicken Cult” because I track most of my expenditures and income on Quicken. Given that I use direct withdrawal to pay for most things, I have a pretty good view of where my family spends their money. I’ll write another article on controlling spending; I am more worried about just bookkeeping.
Do you need to use Quicken to do this? No. You can use Excel, an accounting practice book, a spiral binder, or just keep your receipts for 2 or 3 months (or as long as you can stand keeping track of all of this). The important thing is that you are keeping track of things. You are watching (let’s not discuss the Heisenberg Principal just yet) and learning about your habits.
“I don’t need to track that. It’s only a coffee.”, think you? NO WAY! Go nuts for a short period and keep track of all that INCIDENTAL spending you have. If you are a smoker, you’ll have a heart attack on how much you spend on those.
Let’s do a simple calculation here:
2 Stan Mikita's Large Coffees per day * 5 days per week * 48 weeks * $1.40 = $672.00 (spent)
The thing to remember is this is AFTER TAX money, too. Could you use that much extra a year? If not, mail me a cheque for that amount (I sure can).
The longer you do this “watching” of your spending, the better a picture you can get about your spending HABITS. If you do it for a month, you’ll have a good snapshot, however, if you do it for three months, your picture is a bit clearer (and you are less likely to have “fudged” because you knew you were keeping track), and if you keep track for an entire YEAR, well then you can then plan for a whole year! WOW!!! That’s awesome.
Money is simple, isn’t it?
Now that we have all this data, it is time to separate it into categories. The first is easy INCOMING and OUTGOING. Incoming is simple. That is your pay stub (but remember there is outgoing on there, taxes, CPP, EI, etc.). Outgoing is pretty much everything else. If you want, you can use that big equation:
Incoming - Outgoing = Savings
And see where you stand (and whether it aligns with your bank statement). However, it might be better if you do a little more separation. In the OUTGOING, create subcategories for yourself. Here are a few examples:
- Transportation (Car/Bus/Moped expenses)
- Taxes! (no, don’t add up GST unless you are a glutton for punishment)
- Utilities (if you live in an apartment or condo, you might not need that)
- Miscellaneous (i.e. all that is left)
OK, so we have done this, and we now have a good view of where the money goes and where it comes in, and hopefully, at the end of it, you know why you have the savings (or debt) in that period. Is this the end of our quest? No way, this is only the beginning. All we have right now is raw data. Next we need to use this data to make our financial plan.