Not only how to budget, but how to stay on budget

I've not lived in Canada for 8 years (4 in Seattle and 4 in Korea). I returned March 2008. Even though it's coming up on about a year I've been living in my native country, I keep stumbling on new things. The most pleasant discovery was taxes were a lot better in Canada. The GST (Canada's version of the VAT) and Federal and Provincial rates had been lowered in my absence. My take home pay, the percentage I get to keep, was actually pretty close to my take home percentage in Seattle (a state without a state income tax). Canadians are always regaled with stories about how much lower taxes are in the USA but they usually don't realize things like state and even civic taxes take a chunk. And then they don't realize deductions for social security and medicare take a considerable larger bite than our deductions for Canada Pension Plan and Unemployment Insurance.

I thought I had figured all the mise à jour (as the French would say) type stuff but I'm discovering even more changes this late in the game.

A couple weeks ago I was in a meeting and moaning how much I couldn't wait for January to be over with. (This is the first Canadian winter I've had to slog through in 8 years.) My reasoning was February is a short month and that brings us more quickly to March which sounds warmer but really isn't in Canada but we fool ourselves into thinking March is spring and then about March 20 we resign ourselves to the fact that by April 15 we won't have any more snow storms and spring then begins. Kind of.

It's this kind of thinking that got captured airmen through months of internment in the Hanoi Hilton. That Canadians have to think this way to just keep getting out of bed every morning maybe explains a lot about what makes Canadians the way we are. Canadians, in American eyes, are kind of like an AM radio that's not quite tuned to the proper frequency. Well, now you know why.

Like I say, I was moaning about wanting it to be February in a meeting. One of my coworkers quipped, "you can't wait for the holiday in February?"

Holiday? In February? Whatchoo talkin' bout, Willis?

As it turns out, in my absence, the Ontario government made the third Monday in February a holiday. They call it Family Day. The real joy I experienced at that moment was akin to waking up from a coma and being told there were now two Christmases.

My latest joyful discovery is the government has started indexing the marginal tax rates to inflation. No. Really. This kind of stuff I get off on. For example, in 2008 the first $9,600 of income was not taxed. In 2009 it was raised to $10,100. The first tax bracket in 2008 taxed income over $9,600 but less than $37,886 at a 15% rate. In 2009, the first tax bracket now encompasses income up to $38,832. So about $1,000 more of your income is subject to the 15% rate and not the higher 22% rate in the next bracket. And $500 of your income you were paying 15% tax on is now tax free. On the federal level alone that's a savings of $141 a year. When you include similar adjustments to the Ontario rate it pretty much amounts to $216 that remains in my pocket over a year. Now you're thinking, geez, $216 over a whole year. What do you spend a month on lattes? (Me, nothing, I just stick to the drip coffee.)

But now I want you to think about this $216 another way (assuming you're Canadian and subject to this munificence). Divided by 12 that's $18 a month. Let me suggest if someone once a month came up to you on the street and just handed you $18 and walked off, and the person didn't expect a reach around or anything, wouldn't you think "oh what a fabulous life!"

I would.

Assuming you're paid twice a month, that's really more like someone coming up to you twice a month and giving you $9. Again, I'll gladly wait twice monthly with all the intensity of one of Alex Tsakiris's psychic dogs for that guy with my $9. If someone twice a month handed you $9, you'd be like "wow, $9! I won't brown bag it tomorrow. I'm thinking Arby's!"

Maybe I'm whacked but if someone twice a month was going to take me out to Arby's (or better) Wendy's for a triple or once a month was buying me Indian buffet, the quality of my life would be improved in a tangible way. Once or twice a month I'm now enjoying a pleasure I didn't enjoy before.

The problem is, for most of us, compared to what we earn every pay period, $9 could amount to a rounding error. It's non-bank ATM charges we might swallow every month. It just gets lost in the noise of the 48 ways money comes out of your bank account every month. Unless…

Unless you keep a tight budget and, most importantly, keep on top of your budget on a daily basis. Suddenly discovering an extra $9 in a twice monthly pay period can be not unlike the guy who slips money in your pocket.

Budgeting?

I know.

You've tried it before and gave up after a single month. I have. Until I figured out a system that combines the power of a spreadsheet, instant access to my bank and credit card accounts over the internet, and some free time at work to balance my budget daily.

Here's my system. It's worked for me for years and it can work for you.

Let's assume you gross $50,000 a year. (I'm going to calculating this for an Ontario resident. And the numbers are purely hypothetical and don't represent my financial situations, so feel neither pity nor envy based on the numbers I'm throwing out.) After taxes you net, each pay period, $1,555.08. In other words, on the first of the month your employer direct deposits $1,555.08 into your account. On the 15th, your employer direct deposits another $1,555.08 into your account.

The next step is decide what bills you want to pay out of your first of the month check. Rent is the big one and I always take that out of the first of the month check. I also try to pay at least one other bill out of my first month's pay.

[caption id="attachment_827" align="aligncenter" width="400" caption="Budget Figure 1"][/caption]

Consider my budget for the first of the month (see Budget Figure 1). Create a little table with your expenses, both known and estimated. At the top enter the month and 1 for the first of the month's pay or 15 for your mid month pay. At the bottom of the table enter a formula to calculate your balance. My formula looks like this:

=1555.08 - SUM(B2:B14)

The 1555.08 is the actual net pay going into my account. From this we subtract a sum of all the budgeted items. In this example, I'm budgeting my rent ($800, a known amount), my gym membership ($55, another known amount), and my monthly public transit pass fee ($100, again a known amount). So those are the bills I have to pay. What I don't know is how much money I need to spend on "stuff" and on groceries. You'll figure out exact numbers here over long experience but in the Food cell I estimate I spend about $120 per pay period at the grocery store. In half a month, you can hit the grocery store twice and buy about $50 worth of food, with about $20 left over for mid week runs to pick up milk and bread.

ATM represents an estimate of all my trips for half a month to the ATM machine (yes, I know) and the cash I'm going to withdraw to pay for living. By "living" I mean, you know, living: coffee at Starbucks, movies, weekend entertainment, beer at a pub, etc. That's life to me and that all comes out of the ATM. What I've found is if you brown bag it to work, drink the work coffee, and don't pound back lattes after work, you really don't spend much cash from Monday to Friday. I usually need about $20 in pocket money Monday to Thursday. That's about $50 tops for the whole pay period. This leaves $150 or $75 per weekend (usually each pay period straddles 2 weekends). (It also helps too when your girlfriend lives on the other side of the world and you don't actually have to spend money on her on the weekend but still have the comfort of knowing the "Do I have a girlfriend?" question is checked off your "Am I possibly a loser at life?" mental checklist.)

So we're left with over $280. Whatever is left, that's your savings for that pay period. You'll notice, however, I leave a balance of about $20. You want to pad yourself a bit. Your gym and the transit company don't raise their rates in sync with your annual pay increase. So you want to pad yourself a bit to account for that. Once you're used to saving x amount of dollars from each pay check, it's a real psychological hit to reduce your savings figure. We'll talk more about that extra money later and what to do with it.

Now you'll also notice I have ATM and Food entered twice. The top entries are initially blank. This is where you keep track of your actual withdrawals. The estimates (in blue) have a bit of math (see Budget Figure 2) so the estimate figure lowers as you enter actuals above. The formulas are below:

[caption id="attachment_828" align="aligncenter" width="271" caption="Budget Figure 2"][/caption]

ATM (estimate) | =200-B3
Food (estimate) | =120-B4

Pretty simple.

Okay, so it's Feb 1 and your pay is safely in your account. Your rent check has cleared. Your gym has automatically withdrawn its monthly dues. You've taken out $100 cash and handed it over to the transit guy for your pass. You also transfer $260 over to your savings account.

After all that is taken care of, you notice your fridge is bare. So you go to the grocery store and shop as usual. Well, not as usual. You now know you have about $50 to spend in this trip. You can spend more than $50 but it will just mean your next trip next weekend will mean getting less food. Since you now have a pretty clear number in mind, you begin to make hard choices. The brand name or the grocery store brand? Boneless chicken breasts or chicken thighs which are so easy to de-bone even I can do it?

When you pay, you pay with your ATM card (or check card or whatever it is you call it in the USA). And ONLY pay with your ATM card (or check if your grocery store accepts those). This way you pay only for groceries. If you take out $50 in cash and you end up buying $45 in groceries, that $5 you kind of now dick away. Paying via ATM you are faced with far less temptation to dick away the left over bucks burning in your pocket.

Now, here is the very very important part. It's the part you have stay on top of. And since you'll probably do it during some free time at work, it's pretty easy. Next time you're at your computer, you fire up the spread sheet, login to your bank account, check the exact figure debited, and then enter that into your spread sheet (see Budget Figure 3).

[caption id="attachment_829" align="aligncenter" width="254" caption="Budget Figure 3"][/caption]

So there we go. We can now see we've spent $45 on groceries and we have $75 left until next pay period.

It's now Friday and you need money for the weekend. Okay so you get $60 bucks from your ATM (or the bank teller). And like groceries, next time you're at your computer, you enter your ATM withdrawal. Your mind now knows this for absolute certain: You have $60 in your pocket and you have $140 in your budget to last you until pay day. You now begin to make more rational choices knowing hard numbers.

Okay so let's say by February 14, your budget looks like this (see Budget Figure 4):

[caption id="attachment_830" align="aligncenter" width="324" caption="Budget Figure 4"][/caption]

You've done well. You're $8 in the black in your grocery budget. You're $20 in the black in your pocket money budget. You're ahead of the game by $28 (not including the $20 padding). What I then do is divide the excess (the $28 excess) in half. Save half and carry half over to your next pay period. So transfer $14 to your saving account (making a grand total of $254 in savings that pay period) and add $14 onto next month's ATM or Food budget. The choice is yours. This half thingy means staying on budget not only helps you save more but also rewards you with more flexibility next pay period. And here's another advantage of this system. If you were just treating your bank account like a black box and you only had a vague awareness of what's going in and what's coming out, you would have no idea you're $28 in the black and can spend that with a clear conscience.

And that $20.08 cent buffer? Well, keep ignoring it for now.

Okay so now onto our mid-month pay period…

[caption id="attachment_830" align="aligncenter" width="324" caption="Budget Figure 5"][/caption]

In this next example (see Budget Figure 5), we'll assume you've carried nothing over from last pay check. Since you're not paying rent out of this pay check, you've got a lot more flexibility. Kind of. The mid month pay check is the one I pay the majority of my bills out of.

So again, enter in all your known bills and estimated bills. A gym membership, rent, and transit pass don't vary but things like your electric bill and your phone bill can vary month to month. Here it is good to estimate on the high end so there are no unpleasant surprises when the bill comes and if you over estimated you'll usually be in the black and can roll that sweet extra cash forward to the next pay period for food or ATM.

Also, notice at the bottom I do a credit card estimate like I do for food and ATM. Your monthly credit card bill can really really zing you unless you stay on top of it like your ATM and food withdrawals. Most credit card companies let you access your account online so again check your credit card account when you check your bank balance. Also, credit charges can take several days to turn up in your account so keep that in mind, especially near the end of the month.

Remember, your budgeting is for nothing unless you keep up on what you're charging to your credit cards. So estimate how much you'll likely spend each month on your credit card. Knowing you can spend about $75 a week ($300 a month) on your credit card again informs your purchasing decisions. And it also commits you to max paying your credit cards every month. I didn't use a credit card for the four years I was in Korea but since I started using this budget system back in the late 1990s, it may be the odd Christmas that I have to carry a balance (which I clear up the next month). In other words, I max pay my cards 98% of the time.

So in this example, for my pay check on the 15th, I pay my electricity (power), phone, internet, cable, and insurance. My power and phone are estimates. You never know what long distance calls you might make or how much power you're going to use. Christmas baking can ramp up your electric bill.

The padding I leave in my balance is lower because I assume I'm over estimating my phone and electricity.

So let's look at how the budget plays out by the end of the month:

[caption id="attachment_832" align="aligncenter" width="401" caption="Budget Figure 6"][/caption]

As you can see (see Budget Figure 6), the final balance is a bit higher because I brought my power and phone bill under the estimate. You'll also notice in both the first-of-the-month budget and the mid-month budget money left over in the ATM, Food, and Credit Card items don't reflect in the Balance. Your balance, as I've noted, is there as a padding for when things like insurance, cable, etc. go up in price. Of course if you over shoot your credit card, food, ATM, or phone bill, it also provides a bit of padding.

So what do you do with that left over balance? Well, the money builds up in your bank account, so it's not like it's going to waste. But what you can do is keep a running total in some corner of your spread sheet. Let's say you know next month you'll have to pay for your yearly license plate tabs and that's $80. Well, no problem, over the year you've accumulated $360 in unused balances so you can take the $80 from that and leave your monthly budget figures unmolested. Let's say you've got an unexpected $300 car repair bill. Again, no problem. You can draw down from that $360 padding.

With your budget and full knowledge of how every dollar is accounted for, when you find the government has lowered taxes or changed marginal rates and this now amounts to an extra $10 or whatever per pay check, that money, while it represents a previously intangible 0.6% increase in pay, actually become tangible. You can throw that extra $10 onto your ATM budget. It means "wow, twice a month I don't have to brown bag it". Or you can throw it onto your food budget. It means "wow, now I can buy those fancy Omega 3 eggs!"

Also, considering the current economy, my guess is annual raises aren't going to be much, if anything. Let's say our person netting $1555.08 a pay check gets a 2% raise in 2009. This means he's now taking home $1586.18. A whopping increase of $31 per check. But coming back to our original analogy, if another guy was waiting in the shadows twice a month to jump out and put $31 in your pocket, you'd notice that. And with my budget system, you will.

Honest.

And what do you do when you get a raise? Well, I divide it by half. I add half to what I save every pay check. The other half divide in half again. Add half to your ATM or Food budget. Let the other half sit as surplus to handle any bills that might go up over the next year.

-- Karl Mamer