While a lot of people are getting with budgets, there are still some holdouts who believe they have good reasons for not using a budget.

There are the folks who just can’t wrap their heads around their expenses. Every month they run short of money, going into overdraft or taking cash advances from their credit cards or lines of credit just to make ends meet.  Their incomes may be small or large, that’s not usually a relevant factor. What is relevant is that they don’t have a clue where to start. This is reflected in the question I get most often on my website: “Where do I find the money for the jars?” 

These are closely followed by the people who want me to make a budget for them. They can’t figure out how much to put into each category, so they don’t even take a stab at making themselves a budget. They’re disorganized; many can’t find their bills. Some of them put bills through the shredder without opening them since they don’t have the money to pay them. Budgeting takes too much energy and too much time, and it’s the last thing a body wants to do after a long day at work. And, besides, it’s depressing. There’s nothing uplifting about passing up a new outfit, cooking another bowl of pasta at home, or passing on a night out with friends because you don’t have the money to have some fun.

Some people are afraid. Looking at the numbers would ultimately mean changing their behaviour, and that’s so scary an idea that they choose to remain ignorant. Where’s the satisfaction in knowing you can’t afford to go out to eat three times a week? Where will all that deprivation lead anyway? In their minds it’s enough to say they know things are bad. Looking closely at the details would mean they would have to give up the freedom to blow money on any whim, and who wants that?

Some people hate even the idea of a budget because they don’t want to be told what to spend their money on. They want to be able to keep buying the crap they love to buy.  They don’t want to set any limits. They don’t want to be constrained. And if they’ve been managing to squeak by because they have great incomes, what do they need a budget for?

And then there are the delusional folk. These are the people who won’t even admit they may have a sending problem. Even though every month-end brings a scramble to come up with money to pay the most basic bills, nothing needs to change. And the fact that they’re fighting with their partner is more about their partner being weird, or a control freak, or cheap than their own spending behaviour.

There’s no magic to making a budget. It does take some hard work, and it may require a body to look at some difficult truths. But life isn’t going to get any better, there won’t be money for the really important things, and you won’t stop fighting with your partner until you stop ignoring your money.

Call it a budget, call it a spending plan, call it a road map for your money. Having a budget is the only way you can see what’s really important to you, and put your resources, limited or not, to work for you.

The people who won’t take control of their own lives, make a budget, and make things better are perhaps best captured in this email I received from a viewer of the show (I get a lot of these):

“Dear Gail, we are despret for help. We don’t know where to start. Things are really bad but we can’t figure out where to start. I cry myself to sleep allot and me and my husband are fighting all the time. It’s bad for the kids. Please help us. We don’t want to come on the show because we’re too embraassed, but we need your help and would like you to give us the $5,000.”

Hmmm.

I received letter from a young lad recently that asked a very good question. He wanted to know how he should prepare for home ownership. While I’ve written about what you have to do when it comes time to buy a home, there are also things you should do well in advance of hitting the pavement to go shopping.

1. Save a downpayment. When I tell people they should have a  minimum of 20% of the purchase price for a downpayment on a home, they balk. TWENTY PERCENT! How are we ever going to come up with that kind of money? Well, sweat is one way. Cutting back on what you’re spending is another. Here’s the thing about NOT having 20%: You immediately make the home more expensive because you have to incorporate mortgage insurance fees into the equation. On a $210,000 house with only $10,000 down, the mortgage insurance would be 3.1% of the value of your home or $6,200. Added into your mortgage, that mortgage insurance premium would end up costing you $13,605 if you amortized for 25 years, or $19,330 if you amortized for 40 years.

2. Calculate your carrying costs. I can’t believe the number of people who leap into home ownership without a clue about the financial responsibility they’re undertaking. Home ownership is NOTHING like renting, so if you figure you can afford a home because the mortgage payment is almost like rent, you’re a dope. You’ll have utility costs. You’ll have taxes. You’ll have insurance. And then there’s maintenance… the cost everyone likes to ignore. Resist the urge to guestimate what these costs will be. Find out. Ask friends and family in the area what they pay for heating, electricity, water, oil, whatever your house consumes. Look at real estate listings to see what the taxes on comparable homes in the area are running at.  Use the rule of thumb of between 3% and 5% of the value of the home for maintenance every year. If you can’t afford to carry the sucker, then you’ll know you’re not ready to buy.

3. Calculate your closing costs. Some experts say to estimate 1.5% of the value of your home for closing costs. Others say more. You need to know what to expect so you can make a budget that’s realistic. There are legal fees and expenses, a home inspection fee (don’t skimp), adjustment costs for things like pre-paid property taxes, an appraisal fee, land transfer tax, title insurance, an interest adjustment, a property survey (maybe), water quality inspection if you’re living in a rural area, and hook-up fees for setting up your new services like a phone line. And don’t forget GST.

4. What will you need or want to buy for your new home? From window coverings to appliances, from a new bed to new broadloom, there are always ways to spend money on a home. If you have grass, you’ll need a lawn-mower. If you buy a house with a pool, you’ll have calculate the on-going costs to open, maintain and close the pool each year. If you have a driveway, you’ll need a shovel or a snow blower, or you’ll have to hire strong backs to do the shoveling for you.

Once you’ve worked out what you’ll need to have ready in cash, you can get busy accumulating the money. Let’s say you decide you’re buying a $250,000 house.

• Your downpayment will be $50,000
• Your closing costs will be $3,750.
• Your new stuff budget will be $6,000.

In total you’ll need to save $59,750.

Alrighty then. Now to the cost to your cash flow:

• If you’re buying a $250,000 with 20% down, at 4% amortized over 25 years, your monthly mortgage payment will be $1052.05.
• Let’s say the property taxes run at $2400 a year, so that’s $200 a month.
• And you’ll have to pay house insurance, which we’ll estimate at $100 a month.
• Then there are the utilities, which we’ll estimate at $300 a month.
• And maintenance. Following the rule of thumb you’ll need to budget about $625 a month.

For a grand total of $2,277.05 a month… which is what it’ll cost you to actually live in your new home.

So now we come to the Gail’s Great Advice part. This is where you figure out if you’re ready for the responsibility of home ownership. If you can come up with $2,277.05 a month for your savings (less whatever you may be paying to keep a roof over your head right now), then you’re ready.

Hey, I’m not talking about if you can THEORETICALLY come up with the money. I’m talking about taking that money and socking it away every single month. So if you’re currently paying $1,000 a month to keep a roof over your head, you’d be committing to socking away $1,277.05 every month to your Home Buying Account.

Here why you’re going to do it this way:

First, you’ll learn to live on less disposable income. You better start practicing before you buy your home so you’re ready for the adjustment in your lifestyle when you do take the big steps. Loads of people buy a home and then keep on spending like they did before they became home-owners… racking up gobs of debt.

Second, the $1,277.05 a month is going to get you to your 20% downpayment in under four years. Yup. In just four years, not only will you have enough to put 20% down on your home, you’ll have your closing costs and your new stuff budget covered too. In the mean time, you could have friends and family gifting all the stuff you’ll need for your New Home Adventure for all the birthdays and Christmases in between.

So, whaddaya t’ink? Are YOU ready to take the dream of home ownership from the I-wish-we-could stage to the I’m-gonna stage?

I was listening to my make-up artist, Natasha, and DOP, Adam, talking about how to manage their variable incomes. Adam is a freelancer and always has to be sure he’s got a cushion in case the bottom falls out of the camera-guy-world. Tasha is starting her own business – she a terrific clothing designer. They both have to deal with unreliable incomes and all the stress that goes with.

Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast-Today-Fast-Tomorrow Syndrome.  One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the 30th without racking your cards to the max.

Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you NEED and the things you WANT. You have to have a PLAN.

First, you need to set your salary and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time.

Smooth out your cash flow by deciding what your minimum monthly income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, you’ll only transfer this amount into your Household Account for spending. The rest stays in your Biz Account. Then, in a month when you haven’t billed as much as normal, you’ll still have a whack of cash in the Biz Account so you can transfer your Salary to your Household Account.

To figure out your Salary, do up a budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. 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. And don’t forget taxes. Your second-tier budget needs like home maintenance, clothes, entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories get going!

Now you could have a big fat monthly 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.)

Next, you need to build up your just-in-case fund. The standard recommendation for an emergency fund is to have three months’ income or six months’ worth of essential expenses covered. Aside from the typical reasons to tap into your emergency fund — to pay for a car breakdown, unexpected home repairs or a root canal — you also may need to dip into it in when you’ve gone a few months with no work and have run out of money in your Biz Account.

I use the term “run out of money” advisedly. You should never have NO MONEY in your Biz Account, since the business itself has overheads you must cover: telephone costs, car payments, equipment lease costs, and the like. You should always maintain a minimum of six months’ worth of business expenses -– your Business Buffer — in your Biz Account. When you drop to that amount, you stop pulling your Salary so the business can stay afloat. That’s when your personal emergency fund will really pay off.

Remember you also have to save for the future. Since you’re self-employed, if you’re not socking away retirement savings, you’ll have a pittance when the time comes to stop working. Estimate that you’ll need 70-80% of your current income each year in retirement to set your retirement nest-egg goal.

When business isn’t booming, resist the urge to cut back on savings. Cut back on spending, but keep your savings intact since you will need them later. And stash the amount you’ve decided to save in a retirement account monthly using an automatic deduction.

Make sure you also fill the gaps in your safety net. As a self-employed person, you need to have both disability and (if you have dependents) life insurance. Base the amount of insurance you buy on what it’ll take to cover your basic expenses, keeping in mind that some disability policies replace only up to 60% or 70% of your earnings per year.

Use gravy for other goals. Whatever you have in your Biz Account — your Business Buffer and earnings beyond your Salary – should be invested in a high-yield account.  If you’re doing very well financially, you can now decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree.) Build or replenish your emergency fund if you’ve dipped in, and pay down your debt.  But you should also have some fun.

Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years – some lean, some luxurious. And I wouldn’t swap for one minute the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about six months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a LOT of money. And a good thing too. Because when it came time to have my kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?

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