The word budget can seem like a dirty word to many of those who are afraid of facing their financial situations, but in order to light your FIRE, the budget is Queen. Just like in chess, your budget can be moved and customized anywhere and in any way, as long as it suits your income to expense ratio.
The first step to creating a budget is to know exactly what you are spending your money on and why. Start by opening your online banking accounts (this is usually the standard for viewing finances in 2019 however paper statements will work for this too) and creating a list. Complete and categorize the following:
Money coming IN
- Net Income (all streams including side jobs)
- Interest payments/dividends
Money going OUT
- Credit Cards
- Line of Credit
- Financed Miscellany (vehicles etc.)
- Student Loans
After you’ve calculated what’s left over after you pay all your bills, contribute to debt repayment, and paid yourself your savings contribution you should be left with a number. This is the number that will dictate your financial health.
The Surplus Method is the kindling for the FIRE
The number you are left over with can be one of two things:
SURPLUS or DEFICIT
Surplus means you have money left over after all your financial responsibilities are taken care of. Another word for surplus that you may be familiar with is PROFIT.
Total Net Income: $6,000
Total Expenses: $3,500
Total Debt Repayment: $1,500
When you have a surplus of money, you have breathing room to invest that money in avenues such as TFSA, RRSP or just a good old fashioned savings account. Think about your financial situation as a business that must remain profitable in order to remain afloat.
We may not all end up with three figure surplus in our accounts at the end of every month, but the point is to lower your expenses enough to have something left over every month. Some of us are students and don’t have high paying jobs or are in a tough financial place with debt repayment. All of that is okay, as long as you have a surplus.
Deficit means that you are paying out more than you earn.
(This used to be my financial situation- these are real numbers)
Total Net Income: $1,800
Total Expenses: $1,500
Debt Repayment: $500
DEFICITS are DANGEROUS. I learned this the hard way and ended up in over $10,000 of debt over the course of 3 years.
Do not allow yourself even one month of deficit if you can help it. If you do end up with one month of deficit, have a contingency budget in order to make back the deficit that you lost as soon as possible. Just like compounded interest, deficit piles up and snowballs down the mountain into a people crushing, car consuming monster that cannot be stopped.
1. Creditors Love Debt
One lesson I learned when I was in continuous deficit every month is that the banks and creditors love it. They want to lend you even more money, but you must resist this. Educate yourself on credit health and how to use credit cards to your advantage. I had credit card companies offering me credit card increases that were higher than my annual wage. Of course they knew I could never pay them back- that was the point! Speak to a reputable financial advisor on how to make smart decisions regarding credit and remember that it is not taboo to ask for help or talk about money.
2. Check your banking every single day
If you can check your social media feeds multiple times a day, then you have the time to check your finances. Know where each and every dollar is allocated and when it is coming out of your account. You can catch fraud and keep on top of your budgets to ensure you make that surplus goal every month.
3. Talking about money is not taboo
Do not ever be embarrassed to reach out for help in regards to your money. This archaic old-timey belief that speaking about finances is inappropriate is just that- archaic. You don’t need to put your financial numbers on display for all to see, but speaking about money openly with people you trust will help you become less afraid of it.
4. Read about it
Blogs like The Financial Diet and Money After Graduation have an informative yet approachable dialogue about money. Chelsea (The Financial Diet) and Bridget (Money After Graduation) hold the firm belief that money should be a comfortable topic to speak and learn about. Regardless of how much money you have in your bank account, financial literacy is number one for both these female CEOs. Their platforms are open, inclusive and informative. They update their content frequently and discuss a variety of topics around finances.
Books are your best friends when it comes to finances. You don’t need to be an accounting guru to get a good grasp of the basics of how to keep your books balanced. Starting with basic tried and true books such as The Wealthy Barber, The Millionaire Next Door, The Financially Independent Millennial (which breaks down the Surplus method beautifully) and You Need A Budget will give you basic financial insights that won’t break your brain or require an MBA to understand. My personal financial gateway book was The Financial Diet which taught me the bare-bones basics of what finances really are. The more you read and the more you learn, the more comfortable you will be with your money.
5. Get help when you need it
Finding someone you trust, whether that be a bank hired financial advisor, a self-employed advisor or even a family member that is good with money is your biggest asset. Ask them questions, reach out and never be afraid to admit that you are missing something.