This & That: Money Management Edition
M Wrote: Your book Debt Free Forever completely changed my thinking and attitude towards money. For the first time in my 28 years, I know the worth of a dollar, and how to make my money work for ME, not the other way around.
I have a question about irregular income. I get paid bi-weekly, and as a Nurse who works 80%, my pays are largely irregular (due to what type of shift I work days/nights, overtime, holidays, weekends, they all have a different hourly wage). One pay could be $2,000, the next pay could be $800. I am trying to make a monthly budget, but due to my irregular income, it never works out, so I start over every pay day, trying to come up with a new budget, depending on how much I made. Is there an easier method than this? So far I am doing ok with making a new budget every two weeks, but I figure there must be thousands of other people with an irregular outcome that can make monthly budgets. I would like to know your two cents on this issue.
Gail Says: If your work efforts bring in $800 one month and $2,000 the next you have to smooth out your cash flow. Do up a budget that covers all your basic monthly costs: basic food, housing, transportation, medical. The we-can-live-without-it items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. This is your “A” budget. Your “B” budget covers things like extra nice food, home maintenance… needs that can be dealt with less regularly. Your “C” budget includes money for wants like clothes and entertainment. In your skinny months — when you bring home less — you concentrate on the A budget. When you make more, you can use your B or C budget.
Now you could have a big fat A Budget total if you’ve weighed yourself down with big fixed expenses – like that $800 a month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. But I’m going to assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)
So in the month you make only $800, you can only spend on A items. When you make more, you can spend more on B and C items. You should have a pretty healthy curveball account (read this: http://gailvazoxlade.com/blog/archives/2257) so that if your A budget requires more than that $800 you bring home, you have an account from which to draw the extra you need. Over time, it’ll all smooth out.
D Wrote: We have received an inheritance of 230,000k. We have been struggling for years to make ends meet. And we barely have enough income to cover our monthly expenses. We have been making ends meet but it is tight. No wiggle room at all. We have no debt other than our home. We own a home in Toronto that we bought 3 years ago with the help of my father for a down payment and legal fees. We owe $430,000 a 2.89 % at 30 years. We make 110kgross between my husband and me. We have 2 children, 8 and 3. We are older parents. My husband and I are 48. We have no RRSPs or TFSAs. We have an RESP for our 8 year old daughter since she was born. Nothing for our 3 year old son. I have life insurance and my husband has some thru work. My husband has a pension thru his work.
My father is advising us to put all the inheritance down on our mortgage then get a Line of Credit for the balance and use the Line of Credit to increase our monthly budget. And continue to make our $2000/month mortgage payment to the Line of Credit.
I have talked to a financial advisor who recommended us to put 40k in RRSPs, 30k TFSAs, 2500 into RESPs and invest the rest to gain a monthly draw that would improve our life style and allow us to save for vacations and home improvements. She also said that the RRSPs and putting them and other investments in my name would help us get more money back on our income tax. My husband is in a 46% tax bracket.
We would have to pay the financial advisor 1% of our investment per year. The financial advisor said that we can’t eat our house if we need money. She said if we had enough to live monthly then she would advise us to put the inheritance on the mortgage. But since we don’t, she said don’t worry about the mortgage, you need money to live. I would like to follow the financial advisors advice. But is that too risky? Is she just trying to make herself money?
Gail Says: Good heavens. Such a blessing. So much confusion. Okay, so here’s what I would do if it were my money:
1. I’d open up a high interest savings account and put the $230,000 in it.
2. I’d make enough of a contribution to spousal RSPs (since your hubster already has a work pension) to reduce his taxes. You should see an accountant but if you put $30,000 in a spousal RSP for you, you should reduce his taxes by about $10,000.
3. That $10,000 a year can be used to: a) Fund your children’s RESPs … $2,500 each to max the CESG grant money, b) Supplement your income.
4. I’d max out any unused TFSA contribution room. Since neither of you has contributed, you each have $41,000 in contribution room. And you’ll have some room as soon as the calendar clicks over again in January (hard to tell right now if it’ll be $10K each of $5,500 each, depends on who’s running the country!) THAT’S YOUR EMERGENCY FUND.
5. In March 2016, make another $30,000 RSP contribution (assuming you have the room) again so that you’re building retirement assets for the future. If you both work until 68, you have 20 strong years of potential growth ahead of you, so this is a good plan.
Okay, so we’ve allocated $30K to the first RSP contribution, and $30K to the second RSP contribution, and $82,000 to your TFSAs plus at least another $11,000 for next year’s TFSA contributions for a total of $153,000.
Now, to the mortgage. Just trying to pay off a chunk of mortgage won’t work since the mortgage comes with rules and you have to play within the structure of the mortgage. You should have a principle prepayment option on your mortgage. Usually you can pay off anywhere from 10% to 20% of your original mortgage amount. Find out how much you can pay off and when (some mortgages say on the anniversary date, some at any time during the year, you have to know which). I’m going to guess you can make a principal prepayment of 10% (more is better) and tell you to slap $43,000 against your mortgage as soon as you can.
That leaves you with $34,000 that you can use to supplement your income over the next few years.
Keep in mind a couple of things:
- You can’t just spend that money willy-nilly. That’s your curveball account that helps you cope with your very tight budget. You must still live carefully and,
- You still have to decide how you’re going to invest the money you’ve put in your RSP/TFSA. Those are just umbrellas that tell the tax man to keep his sticky paws off your money. You still have to put that money to work. My golden rule is you can’t buy anything you can’t explain to a 12 year old. I’d look at indexed investing if it were my money.
T Wrote: I have been using your budget spreadsheet and the Jars method since about 2011. I found that your system has really reduced the stress and worry and has helped us manage spending so much. My question is actually about forecasting and finding ways for including that with our budget. Can you think of a way to take your current family budget template and incorporate a forecast and actual variance so that we can take our budgeting to the next level?
Gail Says: Sounds to me like you’re ready to take your money management to the next level, incorporating planned spending, tracking with a spending journal and posting to a cash flow budget.
If there are things you spend money less routinely – think car insurance, property taxes, gifts, sports fees, and the like – you should include a line for each of those things in your budget and set money aside monthly. Let’s face it, if it’s costing you $800 a year to keep your kid in hockey, it’s far easier to come up with $67 a month than to scrape together the $800 all at once. And $100 a month for holiday gifts makes way more sense than heading into a new year with a shopping hang-over on your credit card.
Whenever you need to accumulate money for a particular buy, that’s planned spending, and you should have a separate savings for that money. Each month you total up the amounts going to planned spending and transfer it to your Planned Spending savings account. (For heaven’s sake, use a high-interest savings account. Don’t settle for your bank’s savings account option paying sweet-diddly-squat!) When it comes time to use the money, you transfer it back to your regular account to pay the bill.
Every month you have to enter your spending journal entries into your budget. This is the part of the process that takes discipline. When you have to enter every single coffee purchase you made into your budget, you become very aware of how often you buy coffee. Every entry represents something you purchased. And becoming aware of your shopping habits is half the battle.
When making your entries, don’t start and stop. Research shows you increase the “pain” if you take a break. So plow through to the end.