I need $14,000. There I said it. But how did I get here? What the hell happened? Did I go crazy at the tables at Casinorama? Did I pull a not-so-friendly Community Chest card in the real-life version of Monopoly? Did I go long the Mexican Peso when Trump was inaugurated? None of those I’m afraid…
One goal I did not mention in my previous post, was to have a well-defined budget. Truth be told, I had a budget planned out in 2016, and for the most part I stuck to it. Budgeting suddenly became very important when I became an independent consultant: as a contractor, you need to know exactly how much money you need, because this ultimately drives the lowest per hour cost that you can live with. If you charge too low, then you will not make enough to cover your regular expenses; so anything you charge over your minimum per hour rate is butter on your bread. Example: if I know that I need to charge at least $50/hour to cover all of my expenses (this includes my personal expenses, as well as corporate expenses), if I can find a contract which pays me $60/hour, assuming a 7.5 hour work-week and two weeks vacation, this means I suddenly have $18,750 more I can play with. But, if a contract paid me less than $50/hour, say, $40/hour, I would be short $18,750. But, I will save the per hour calculations for another post; today, we are here to speak about budgeting!
So, in 2016 I got into the habit of planning out my personal and corporate budgets to the penny. Budgeting is not easy task. You have to ask yourself hard questions, and you have to keep yourself to your budget. If you only budget $100/month for eating out, then you have to be damn well sure that you spend no more than $100/month on eating out! While this sounds easy in principal, it rarely is: easy access to credit, and convenience payment methods such as credit cards, tap-and-pay, paying with your phone, etc., make it all too easy to lose track of your spending.
The hard questions really revolve around what you need vs. what you want. Sure, I want to go out to a fancy restaurant every week, but is that something I need to do? Moreover, when you actually plan stuff out, you realize how much friction discretionary expenses cost you. Case in point: if you go to see a movie every other week, you can spend easily $390 on tickets alone (26 weeks @ $15/ticket). Factor in dinner that you will likely eat when you go out with your friends, the concession stand, gas/transit, etc., and you can easily get up to over $1,000 per year just on going to the movie! Now, consider what other frivolous items you spend your money on!
Our family is growing this year, with a wee one on the way, which will drive a slew of new expenses (diapers! building a nursery! strollers! diapers! baby food! diapers! did I mention diapers???). We also moved, I am 17 months away from paying off our family vehicle, and 53 months from paying off my rental property. When you take into account all of the negative cashflows (e.g. regular expenses, discretionary expenses, paying off liabilities such as mortgage and car, savings, investing), my net income is $14,000 short of my aggregate cash outflows; e.g. if my net outflows are $50,000, I am only making $36,000, $14,000 short.
What does this mean, practically speaking?
Well, when you are budgeting there are really two types of cash outflows:
- Fixed / required costs
- Discretionary costs
Examples of costs which I cannot avoid–no matter how much I would like to!–include:
- My mortgage, and the interest on my mortgage
- Car payments
- Utilities (gas+water+hydro) and property taxes
- Pet care (food, vet)
Costs which are discretionary–I can simply not spend this money if I don’t need to–include:
- Eating out
- Buying books/movies/music
- Donations (e.g. to the Toronto Humane Society, United Way, Kids Help Phone, etc.)
So, while I am “short” $14,000, this is purely from a budgeting perspective. Simply because I have $600 budgeted towards going to the movies/buying new music/buying new books, does not mean that I will have to spend $600. That said, I believe 2017 will be a year of frugality: instead of buying books, borrowing from the library. Instead of buying CDs, *cough* borrowing *cough* them from friends (or the library!). Driving less, etc. Ultimately, I would like to make a complete reversal, and instead of finding $14,000 in new funds to fund my shortfall, increasing my overall savings by some amount. These guys are hella inspiring in that regard! I would relish the opportunity to save 60% of my regular income, alas, that’s not going to happen anytime soon.
With that in mind, one more metric that I will be tracking on monthly basis is my personal budget, and how well I am tracking to it. My goal is to tighten my belt enough that I can avoid dipping into long-term savings to cover the $14,000 shortfall. One thing that I have gotten into the habit of doing is using cash instead of credit. In fact, the only things I use my credit card for at the moment are gas, and online purchases. But, if I am driving less, that implies I will be purchasing less gas, which means I will be using my card less. If I cut down on buying things online (e.g. books on amazon.ca), then I’ll be able to cut down on that avenue as well. Previously I was drawn to the siren song of bonus dollars and cash-back cards (such as the Tangerine Cash-back card, which gives 2% cash-back on three categories; if you are going to sign up for one, please use my referral ID, 16176076S1). However, the problem with cash-back cards is that you really have no idea what you’ve spent until the bill comes in the (e-)mail; on a regular basis I was getting hit with $1,000 bills without faintest idea as to where my money had gone. That said, my frugality principles for 2017:
- Cash, not credit
- Drive less, transit more; even easier since I have a TTC Metropass
- Borrow, not buy, in the case of books
- If I have to buy, buy used, through craigslist, Kijiji, or eBay (although eBay offers less and less in terms of bargains nowadays!)
- Learn to say no: if a bunch of friends wish to go out, if I don’t have physical cash in my wallet, don’t do it
- Look for cost cutting measures around the house
I’d be curious to hear what methods you are all using to cut costs, and generally have more savings on hand!
Onwards and upwards!