After helping people with financial issues they sometimes ask me, what is budgeting, what is monthly budget and how do I set one up?
People who live with constant ﬁnancial stress want a family monthly budget as a way to solve their money problems. Reality tells us a family budget is often nothing more than just a good idea. When your ﬁnances are in serious trouble it usually means that you do not have enough monthly income to cover all your monthly expenses.
But people will draw up budgets hoping to ﬁnd an answer. Sometimes it becomes an exercise in magical thinking. We put ourselves on a budget starvation plan eliminating restaurants, Christmas gifts, vacations and any other cost associated with fun or relaxation. Many people that reach out to a Licensed Insolvency Trustee or look at doing some form of ﬁnancial reorganization through a consumer proposal, have already experienced disappointing results in family budgeting.
Yet, a trustee will want you to do a family budget. What is the difference? A bankruptcy or proposal allows you to do a complete makeover of your ﬁnancial affairs by eliminating or reducing the amount of money you have to pay out each month. The budget is shaped by what you have as monthly income, not by what you owe. To get started, I invite you to start using the Personal Monthly Budget work sheet.
The following are some family budget guidelines that work for families. It suggests the range of payment that can be afforded in each spending area. You can use it to establish a budget based on your after tax income.
Typically this is one of the largest budget problem areas.
Many families buy or rent a house they cannot afford. Housing decisions should be based on need and ﬁnancial ability, not on internal or external pressure. Remember this includes all housing costs including taxes, insurance, heat, power, maintenance and improvement expenses.
Many families spend too much for food, others do not have enough. Shopping at low cost grocery stores and cutting back on restaurants and fast food outlets can really help reduce the amount you spend. A food budget can be a really tricky area because so many life events involve food and we can be significantly influenced by our entertainment choices. Changes in a family’s food bill require planning but careful tracking can help you become aware of your spending and shopping habits and help keep costs down.
Families sometimes buy cars they cannot afford. They trade them in long before their usefulness has expired, and roll unpaid debt from the last car over to the new car.
Changing monthly transportation costs can be important when a person is looking to improve their ﬁnancial circumstances through a bankruptcy or proposal. Sometimes a more fuel efficient vehicle or public transportation can significantly reduce your transportation costs. Also, planning for repairs and general maintenance will ensure you’re not scrambling or turning to credit to cover these costs.
DEBTS AND LOAN PAYMENTS (10%)
This is the number suggested by most ﬁnancial planners. It is an ideal number and somewhat laughable for the person struggling with a heavy debt load. This number should be regarded as something that might be possible in a perfect world. For the struggling debtor it is an indicator of how steep your ﬁnancial problem may be.
Although it would be great if family budgets restricted themselves to only 10 percent debt, it is more likely that you need to look at making cost savings in other areas. But, keeping debt at lower levels in relation to net monthly income is always a good idea.
SAVINGS AND INSURANCE (10%)
Many ﬁnancial planners work in the ﬁnancial and insurance industries. They have a strong and healthy bias towards insurance, investments and savings. Sufficient insurance and savings helps protect you when life throws those financial curveballs.
We all understand that these targets would be unattainable for people struggling with the burden of consumer debt.
Debt can be so depressing. People get weighed down by their money problems.
Many people who have ﬁnancial difficulties actually increase their entertainment expenses in trying to escape the frustration of the stress.
So, we use credit for a vacation, special outing, or for tickets to a concert or sports event. We know we may not be able to afford it but we long for ourselves and our family to be able to escape from the constant stress of ﬁnancial limitations.
If you’re looking at your financial budget and wonder how you can save money, entertainment is usually a place where adjustments can be made. For example, there are many free, stress relieving entertainment choices in your community that are suitable for any age.
This is one area along with food that a wise shopper can make an enormous difference. Proper clothing is important. Shopping sales, discount warehouses, and clothing swaps are just a few of the ways you can still look great while maintaining a balanced budget.
ABOUT THE AUTHOR
Kelly Dey is a licensed trustee in bankruptcy throughout Ontario.
As a Licensed Insolvency Trustee, she is licensed and regulated by the Superintendent of Bankruptcy to administer proposals and bankruptcies. She continues to actively consult and provide guidance to those seeking to file a bankruptcy or consumer proposal in Ontario.
Yanch Dey & Associates Ltd. offers a wide range of bankruptcy and debt management services in the GTA, Durham Region and County of Northumberland.