This article was written in partnership with the Chartered Professional Accountants (CPA) of Canada.
Creating a budget is difficult when you aren’t sure how much to save, what to save or what some financial terms even mean.
Before you start to create a budget for yourself or speak with a financial advisor to help you accomplish your financial goals, here are some terms and methodologies that you should become acquainted with.
Saving from what you earn: the action of withholding (investing) a portion of your income today for tomorrow. Part of your disposable income is not spent.
Saving from what you spend: the act of economizing; a reduction in cost. When you reduce your spending and increase your saving, you are setting yourself up for success.
Types of expenditures
We all have bills to pay, groceries to purchase and food to put on the table. But it’s important to consider all levels of expenses when creating a budget. When you’re creating a budget, consider ways to lower the cost of your expenses regardless of what these expenses are.
Major capital expenditures
Major expenses are the large purchases that you make during your life. This includes purchases such as the following:
- Your mortgage: Consider speaking with your mortgage advisor on different ways to pay your mortgage (monthly, accelerated bi-weekly or accelerated weekly). The sooner you can pay down the principal of your house, the less interest you will pay over time.
- Vehicles: Evaluate whether your family requires multiple vehicles or can just share one. When you are buying a new car, don’t be afraid to try and negotiate the purchase price down.
- Household appliances: For large appliance purchases, prioritize which ones you need to replace versus the ones you want to replace. Once you determine which appliance(s) you will be purchasing, create a plan for how to save for it.
These day-to-day expenses are what help make your world keep spinning. However, cutting down costs is easier said than done. Some examples of day-to-day expenses and ways to cut costs include the following:
- Food purchases: Can you find weekly deals in flyers to save on groceries?
- Household operating expenses: Keep track of heat, electricity and water. Be sure to use your utilities
- Transportation: Can you carpool or use public transit?
- Be conscious of where you make your purchases: Are you paying a premium to shop at your favourite store but can find the same goods for cheaper elsewhere?
Hidden expenditures can easily get the best of us and add up fast. It can feel like an unwelcome surprise
when you check your credit card statements and see a number of expenses that didn’t seem that costly at
the time but have quickly added up. These hidden expenditures can appear as the following:
- Credit cards: Do you pay interest each month? If so, do you know how much interest you pay? Do you have any hidden subscriptions that are being charged to your credit card automatically? Do you have a solution for getting out of credit card debt? If not, don’t be afraid to meet with a financial advisor to help you create one.
Remember, cash is King. If possible, avoid spending on credit. If you cannot afford to buy it with cash, consider whether this item is a NEED or a WANT before putting it on your credit card.
For more information on budgeting, visit our other blog on savings strategies where you can learn all about how to budget, access free budgeting tools as well as gain further insight into your own financial situation.