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Plan a budget for better savings

11 August 2017 by National Bank
Plan a budget for better savings

Where does your money go? It seems to vaporize as soon as your pay cheque is deposited into your bank account. In conditions like that, saving isn’t easy… Here are some tips to regain control.

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No matter what project you have in mind, saving up is usually the first step to make it happen. That might mean putting money aside for a vacation, trading in your car, accumulating a down payment to buy a house or planning your retirement. Saving is also essential for building up a financial safety net.

Clearly there are lots of good reasons to save, but strangely, month after month, it seems impossible to put even a few dollars aside… Is saving really that hard? If you use the right tools and develop the right instincts, it’s less difficult than it seems. Here are a few ideas to get off on the right foot.

The virtues of budgeting

To figure out how much you’ll be able to save, you first need to get a handle on your income and expenses. Only then will you be able to determine where you can cut back. To do this exercise you need a budget; it’s unavoidable and the first step towards building healthy financial habits.

There are different ways to do this. You can do it for yourself or for your family, if you prefer to include your partner’s income and expenses, and get a more global picture of the situation. But the basic idea stays the same: take stock of your situation so you can identify areas where you might be able to cut back.

Once you’ve built your budget, it’s time to make choices, according to Annamaria Testani, Vice President of National Sales at National Bank Investments. “It all starts with you. The question to ask yourself is: to what extent are you willing to make sacrifices to reach your goal? It’s a bit like losing weight. To succeed, you have to exercise, eat well and control your portions. Saving requires the same amount of discipline, but it gets easier when you examine your expenses column, because that’s when you understand the real power you have,” she explains.

Of course there are some expenses that can’t be eliminated or reduced. But what about that café latte you buy every morning on your way to work? That ends up costing you $100 a month, and nearly $1,200 by the end of the year. Same thing goes for the times you go out for lunch rather than bringing one from home. When you see it all added up, it’s easier to make decisions.

“It’s not about depriving yourself,” Annamaria Testani asserts. “You can absolutely continue to spoil yourself from time to time, just be responsible about it,” she says.

Rules for successful budgeting

There are some basic rules for building a budget. First off, you have to determine your income, then list your expenses under three categories: fixed expenses (rent or mortgage, electricity, insurance, transit pass, etc.), living expenses (food, gas, etc.), and finally occasional and unforeseen expenses (clothing, car repair, etc.).

With this in hand you’ll be able to create projections for the year to come that will give you a better idea of your overall financial situation, and help you set savings goals. At the beginning of each month, make a plan to stick to your budget, and when the month is over, write up a balance sheet to make sure you’re still on track. You’ll have to monitor your daily expenses to make this work.

Different budgeting methods

There are two ways to prepare a budget and the projections that stem from it. Zero-based budgeting (ZBB) consists of distributing all your resources to line items in your budget: rent, electricity, gas, insurance, food, daycare, transit, etc. You’ll need to create a savings category too, to make sure you’re putting aside a predetermined amount. This method is well adapted to people who have a hard time controlling their expenses, because every dollar earned is systematically attributed to a line in the budget.

If you’re more disciplined, you can adopt a more flexible budgeting method that doesn’t require you to systematically attach every dollar to a line item. With this method you’ll have funds left over that you can put into savings, rather than spending them on superfluous expenses. In either case, deposit your savings in a high interest savings account or a Tax-Free Savings Account (TFSA). A TFSA allows you to withdraw funds when you need to, and it still won’t be taxed.

Systematic saving

Experts agree that the simplest way of putting money aside is through systematic saving. For example, you can set up automatic transfers twice a month, on the day you receive your pay cheque. “When you do it this way, you save without even thinking about it. You can set up automatic transfers for every week, every month, anything goes. The important thing is to start,” Annamaria Testani confirms.

Little by little, you’ll learn to live without this money, because it will disappear from your account before you even have time to use it. It will be deposited in a savings account, a TFSA or an RRSP.

Even if it’s only a few dollars at a time, any start is a good start… And your savings will only grow. Don’t forget that the earlier you start, the harder your money will be working for you. Your advisor can help you find the most appropriate investment solutions based on pre-determined criteria for your needs and investor profile.

Useful tools:

  • Examples of budget calculators:
    • National Bank calculator
    • Financial Consumer Agency of Canada calculator
      • Income, expenses and budget module:
        • Financial Consumer Agency of Canada
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