Money Is Fun Until Its Done
By Faiq Farooq
I think I can safely say that most students in Bishop Reding don’t have money in their bank accounts or don’t manage it effectively. It’s the sad reality that we have to acknowledge. We don’t have much money to spare as a result of being broke high school students. Money has to be exchanged for goods and services, which is how we acquire most things we need or want. Luckily, if you know how to manage your expenses, it’s quite easy to make your dollars stretch. If you develop financial literacy skills now, it’s something that will help you for your entire life.
In short, a budget is an outline of what your expected income and expenses may be. A budget will help you primarily control your spending, but it’ll also help you plan for expenses and save for future goals. By showing how much you spend on certain items (probably a lot of junk food for most of us), it acts as an incentive to cut spending in certain areas. The biggest rule in personal finance is if your spending exceeds your earnings, something has to change. You either have to earn more, spend less, or both. That’s it! There’s no complicated formula or CRA mandated algorithm to manage your money. My father taught me a simple rule for when you get your first pay-check, “save the hundred’s and stretch the ten’s”. This rule can obviously apply to any money you may receive. For example, if you earn $594 every month, you have to save the $500, and you can spend the $94 on whatever you wish. There are a lot of other ways you can manage your money effectively and a budget will fine-tune that for you.
It’s quite simple to create a budget, you can either create a spreadsheet or use a website or app that automatically creates one for you (mint.com, Left To Spend, or SmartyPig are great examples). For the purpose of this example, we’re going to use Google Sheets. If you try to make the budgeting process as fun and easy as possible, you’ll have the motivation to persevere with it in the long term. Once you become more capable, you may try different methods, that’s completely fine, as making and using a budget is a constant work-in-progress.
The first step to creating a budget is figuring out your cashflow. This doesn’t just include your pay check, but your allowance, any gifts you may receive, interest from your savings account, basically any income flow. You may have a fixed amount of income each month or it could change throughout the year. For example, a lot of students may change the number of hours they work during summer break. Similarly, spending is likely to also fluctuate throughout the year.
Above is an example of what would be the income portion of a budget. This person makes an average of $850 in wages per month, which is a substantial amount. Despite that, they also include what might be considered insignificant, which includes gifts, allowance, and interest. Interest is the percentage that your bank may pay you according to the balance in your savings account. Include tips and bonuses when accounting for wages. Notice how this person accounts for every last penny earned. Though it may not seem like it, small amounts of money per month unaccounted for, or wasted will add up over time. This person has also included a total income per month. This is important, because by knowing your total income you have an idea of what you can save after expenses.
Planning for expenses is usually a bit trickier. Some expenses are known, such as your car insurance premium. Others require you to make an educated guess based on your spending history, such as clothes or dining out (this is where tracking your expenses over time is helpful). The most important thing is spending as little as possible, this in turn helps you save as much as you can. Save wherever you can and don’t be afraid to be a little thrifty or frugal. If you need something, see if you can make it or buy it used. See if you can pay for your car insurance with the help of your parents; your parents can also add you as an occasional driver on their insurance, saving you a substantial amount. If you spend $8 a week on eating out, see if you can cut that out. $8 a week adds up to $416 a year, although junk food is one of the finer things in life (especially shawarmas, no doubt about that), the benefits of having an extra $416 in your bank account are far greater.
Your expense categories will be probably be different than this. The important thing is to set up enough separate categories to be useful. When creating the expenses portion, be sure to be specific. For example, one category labelled “bills” won’t cut it, split it into “cellphone”, “gym membership”, etc. You may find that the categories will need to be adjusted in the future. Everyone’s needs and wants change over time and this person did a great job by adding total expenses. A total expenses helps let you know how much income and expenses may differ and assigns a number value to your spending. By seeing how much you collectively spend, it may help you bring that number down and save more.
This is probably what your budget will look like in the end. The last row (Income – Expenses, highlighted in yellow) shows if the budget is balanced for the month. If any month ends up negative, you’ll have to revise spending to balance the budget. Obviously there are things you may not be able to cut out, such as your car or cellphone expenses. See if you can cut down on discretionary spending like clothes or food. If you do happen to go in the negative (which I cannot stress enough, don’t), any surplus from one month can be carried to the next. This way you can maintain a balanced budget (and hopefully a surplus), throughout the year. Just list that money that’s carried over under “Income” as “surplus”.
Without a budget, the person in this example may have come up short in one or more months without realizing their spending. With limited income, a budget can and will be tight. Expenses such as insurance and the cell phone plan, which can’t be changed have to be prioritized and paid first. Any extra money can then be categorized and saved or divided in other categories.
Your first budget might actually be an eye-opener for you. By laying out what your expenses are, it really enforces the fact that you have limited cash to spend. It might be tough to get a cheaper phone, or not get a car for now, or not eat out all the time. But it’s a lot harder to realize that you can’t pay necessary costs. Planning out your finances helps ensure that your money is wisely spent and saved. It’s all worth it in the end when you see that large number in your bank account.
Even if you may not have the largest bank account or the best control over your finances, it is with complete confidence that I can say that making a personal budget will definitely help you.
Practising financial literacy skills from an early age will definitely help you as an adult. As important as it is to enjoy your life now, your bank account is worth paying attention to from the get-go, saving habits don't always get the attention they deserve. So get saving!