Budget Basics Step 1 – Clearly Identify Your Starting Financial Position

David Sklar & Associates – Toronto Consumer Proposal and Bankruptcy Trustees,
Share the Lessons of Successful Budgeting

This is Step 1 of Budget Basics - if you have not yet done so, we recommend you begin by reading Budget Basics – How to Set Up a Budget You Can Live With, where you will find a useful overview of the whys and hows of successful budgeting.

Look at any map for directions and you will quickly discover that you need to know where you are now to determine how to get where you want to go. The same is true for building your financial security – yet most people would rather do almost anything than take a look at where they are financially. This article and the others in this series will help you to take important steps towards successfully managing your financial future – and away from being a financial ostrich.

This process can be a little scary, especially if it is the first time you have done this (ok a lot scary – but still no reason to bury your head). Just remember to be as honest and as accurate as you can be. The more accurate you are – the easier it will be to find your way out of debt and on your way to financial security.

In this step you will be recording where your finances are at right now. When completed, this document will serve as a handy starting point to achieving your financial goals. If you are part of a family (2 or more people), you most likely will need to fill in all the family details of income and expenses on one worksheet. Whenever possible, we recommend that couples work on their family budget together.

Identifying Your Starting Financial Position (Where You Are Now):

1)  Set aside a couple of hours to complete this step – getting it done in one setting will help you to complete this task.

2)   Put off using computer spread sheets and planners for much later in the process – for now, all the equipment you will need is several sheets of lined paper, a calculator, and a pen or pencil. If you wish, you can print out and use the Monthly Expenses and Income Worksheet. If you use the worksheet, you will need to customize it to meet your specific requirements.

3)  Gather up all your financial records and have them handy. You may need to organize them somewhat depending on what your record keeping system is like. Your financial records will include such things as bank statements, bills, income records (ie pay stubs), loan agreements, credit card statements, etc.

4)  Begin – if you don’t have all the information you need at your fingertips – make your best guess (you will be updating this information over time so don’t panic – just do your best).

5)  Start by recording your Current Expenses:

Break your current expenses into three simple categories:

Fixed Monthly Expenses, Variable Monthly Expenses and Infrequent Expenses.

Some of your expenses might not be in the same categories as shown. For example, if you pay your Auto Insurance monthly instead of annually, your Auto Insurance expenses will be a Fixed Monthly Expense rather than an Infrequent Expense. Note: where an average monthly expense is recorded will not change the total average current monthly expenses, so don’t worry too much – just make sure the expense is recorded and included in the total.

Not all of the items listed will apply to your situation – but make sure any expenses that do apply are recorded.

Fixed Monthly Expenses – those ‘same amount’ expenses you see every month – record monthly due date and monthly payment amount for each expense:

Rent / Mortgage - if you have a mortgage, record the total amount of the mortgage and the interest rate you are paying.

Strata Fees

Judgements – ie Child Support, Alimony, etc.

Loan Payments - for each loan – write down a description of the loan (ie car), total amount of loan, interest rate being charged, and how long till the loan is paid off.

Credit Card Payments - for each credit card – write down the name of the card, monthly minimum payment (based on your current balance), total amount owing, interest rate being charged. Note we do not normally recommend just paying minimum payments on cards unless it is part of a larger pay-down-the-credit-cards plan.

Other Fixed Monthly Expenses

Variable Monthly Expenses - average monthly costs of those expenses that vary from month to month – include monthly due date for each expense:

Electricity

Heating - if not electric heat.

Phone

Cable

Food

Child Care

Clothing

Transportation – Auto Gas, Parking, Auto Maintenance (monthly average), Bus Pass/Tickets, etc.

Entertainment – Restaurants/Pubs, Cigarettes, Movies (Rental & Theatre), Sports, Books, Hobbies & Crafts, etc

Other Variable Monthly Expenses

Infrequent Expenses - average monthly costs of those items that normally only occur once or twice a year:

Home Repair

Home/Apartment Insurance

Auto Insurance

Life Insurance

Taxes – Property

Taxes – Income

Holiday Expenses – ie Christmas, Easter, Thanksgiving, etc

Birthdays

Other Infrequent Expenses

6)  Total up your current monthly expenses – by adding the Fixed Monthly Expenses, Variable Monthly Expenses, and average monthly cost of Infrequent Expenses. Make sure that all of your expenses are included in this total – if you have an expense that does not seem to fit in any of the above categories treat it as a stand-alone expense and add the average monthly cost of that expense to your total current monthly expenses.

7)  Calculate your average monthly income – using your pay stubs, calculate your average monthly after-tax take home page. If you are paid every 2 weeks, be sure to multiply your after-tax take home amount by 26 and then divide it by 12 to get the monthly average. Make certain you include all of your average monthly after-tax income from such sources as commissions, child tax-rebates, alimony, child support, odd jobs, etc in your total average monthly income.

Now You Know Where You Are

Now that you have completed recording and calculating your average monthly expenses and income you have a much better idea of where you are in terms of your financial position. If you are like most of us, you had a few surprises during the process. But good or bad, it is always better to know where you stand in terms of your financial position.

Take the Next Step

The next step in our Budget Basics is to Clearly Identify Your Financial Goals (where you want to go).

This was the First Step of a five part series on setting up a workable budget. The entire series can be found here:

Budget Basics – How to Set Up a Budget You Can Live With - An Overview

Budget Basics – Clearly Identify Your Starting Financial Position - Step 1

Budget Basics – Clearly Identify Your Financial Goals - Step 2

Budget Basics – Setting Up Your Budget - Step 3

Budget Basics – Follow Through or Rinse and Repeat - Step 4