Episode #2: How To Budget For Beginners (Without Hating It!)
I suck at money. That’s a phrase I hear people say all the time. I suck at money. Or the kicker, ‘I suck at money, so my partner manages all the money’. One of the most important topics we cover here at The How To Adult School is personal finance, and I do not want you to skip over these sections because your party line is ‘I suck at money’. So if you’ve ever found yourself saying or thinking this, or if you’ve ever made the joke that your financial plan is to ‘marry rich’, but it’s actually not really a joke, then this episode is for you!
Personal finance is one of the most important topics we cover here at the how to adult school, because I believe that everybody deserves a proper financial education that’s taught in a way that is easy to understand, accessible, and immediately applicable to your life. So, if this is something you missed in school, and something that you really need, make sure you subscribe to the show AND join the free 7 day money icebreaker challenge I’ve created for you!
What will you learn here today?
SO, diving in. If you’ve ever said ‘I suck at money’, I need you to leave that at the door. Because here’s the thing, it’s not true. You do not suck at money, but, like most of us, your education probably completely skipped over teaching money management skills so you simply have never been taught how. Would you say, I suck at making cake, if someone just expected you to figure it out on your own, no recipe or anything? No, that would be insane, so, I want you to stop saying that you suck at money, until you’ve at least tried to learn a bit more about it.
This episode is going to teach you the very beginner basics to starting to look at and understand your money. You’re going to learn how to stop being afraid of looking at your bank account, how to understand what you earn vs what you spend, and how to start tracking your numbers to understand your money patterns.
Today we’re going to start with the very first lesson we should all learn about our money. We’re going to start learning simply how to track and understand what we earn vs what we spend. This is the first skill you need to develop to start budgeting, and will also help you stop being afraid of your own bank account.
I promise there will be no guilt, no judgement, no ‘you should do this’, or ‘you have to do that’, just simply gaining an understanding of your numbers. Are you with me? Let’s get started.
Step 1: Learn how much money you make
The number one thing you need to know is exactly how much money you make. There are three versions of this number you need to know, and I suggest writing them down every year. You need to know:
What your salary is (aka what your job or jobs pay you in total)
Your after tax income (how much you actually have to live on after paying your taxes)
Your household income (if you’re in a relationship or have more than one person contributing to the household finances). Again, know this number both before and after taxes!
The first one should be straightforward. Know what your salary is. This is your pre-tax income, and if you don’t remember or know exactly, just ask your HR department to remind you. If you’re self employed like me, you have to run reasonable predictions about your income. I recommend predicting your best, worst, and middle case scenarios based on the information you have at hand.
Next, knowing your after tax income is the most important number to know, because this is how much money you’ll actually have to spend. If your salary is $60,000, you don’t actually have $60,000 to spend because you have to pay taxes on this. The amount of taxes you pay in Canada depends on what tax bracket you’re in, which is a sliding scale based on your salary. To learn what your after tax income is, again, you can ask your HR department, or use an online tax calculator for the area that you live. For example this after tax income calculator is for ontario. In Ontario, if your salary is $60,000, the tax calculator will show you that you pay just over $14,000 in taxes on that, so what you actually have to spend is around $46,000, not $60,000.
If you’re an employee, your employer will deduct this amount from your paychecks and pay your taxes for you, so you’ll never actually even get the full $60,000 salary in your bank account, which is awesome. If you’re self employed it’s really important to understand how much taxes you’ll have to pay because YOU are responsible for it. You’ll take in $60,000, and you will have to put aside the roughly $14,000 in taxes that you’ll owe.
Finally, understanding your household income means you need to have a discussion with your partner about what you both make. You both need to share your numbers with each other and again understand your before and after tax income numbers. I’m not asking you to get into a discussion about spending, or budgeting, or any of the other tough stuff, you just have to know what you both make. It’s SO important.
Step 2: Choose one or two ways to spend money, simplify your life!
The second step you need to take is deciding HOW you’re going to track your spending, not even figuring out what you spend, just HOW you’re going to keep track of it.
So many people don’t bother to figure out how much they spend, because they don’t have a simple, easy, system to keep track of it all. You probably spend money every month by using multiple credit cards, debit cards, cash, tips that come right in and go right back out again, e-transfers, bank transfers, wireless phone transfers etc. It’s honestly exhausting to try and figure out what you spend when you have to look at 9 different accounts and statements every month.
Choose one or two different ways to spend that work well for you. Don’t let yourself use a hodgepodge system of credit cards, debit cards, cash, cheques, e-transfers, you will drive yourself crazy.
You’ll have to weigh the pros and cons of each based on your own life and spending patterns, but personally, I like using credit cards. They give you a detailed statement that breaks down your spending at the end of each month, it’s impossible to ‘miss’ or ‘lose’ a transaction, and I like collecting points. Some people have a hard time managing a credit card, or maybe can’t always get one, in which case you might prefer a system like the classic weekly cash envelope system. If you do this, then it’s so important to keep all of your receipts so that you can look back and figure out where you’ve spent money. That’s the most important part, that you can look back and track what you spent.
Step 3: Start to track your expenses and understand where you spend your money
I know this part sounds like a lot of work and is probably what scares you the most, but remember that knowing and understanding is going to be the first step towards not being afraid of your bank account.
I want you to commit to tracking your spending for a few months. You’re not allowed to judge yourself, you’re not allowed to feel guilty for spending money on things, and I’m not asking you to change anything. So don’t put that on yourself yet. The goal of learning how to do this is to simply figure out what your habits are, how you like to spend your money, and how much you’re spending in relation to how much you’re earning. You have to know these numbers before you can do anything else.
This spending tracking is something that needs to become a system or a habit for you. I’ve set up a system to look at my numbers once a month, on the first of every month, and the rest of the time I don’t worry about it. Maybe you need to look at it every week, maybe it has to be a nightly routine for you, that’s an individual decision. Find the best time for you to look at your spending and stick with it for a few months. The only thing I’ll say is I don’t recommend looking less than once a month.
Start by printing out your monthly statements and/or collecting your receipts. Go through your statements and write it all down. “I spent $48 on gas, I spent $6.00 on a latte, I spent $2,500 on rent.’ Everything gets written down.
Once you have your expenses list, you will start to see patterns and understand some of the main categories where you spend money. For example your rent/mortgage, utilities, groceries, eating out, car payments, shopping for clothes, your dog, haircuts, travel. As you see these categories start to emerge, you can start separating each item into its category, and then add them up so you know how much you spend in each category. Sometimes these categories change, some months you’ll have spent money on travel, and other months not at all. As you do this, you’ll gradually start to get a bigger picture of your spending habits, and where your money goes.
Even though you’re starting out with a few months, the goal is to start building the habit of regularly tracking your expenses every month. Getting a whole year’s worth of expenses tracked is super valuable because there are inevitably things you spend money on that only come up once or twice a year, like paying your car insurance in a lump sum, or getting your haircut every 6 months. So it’s important to get the big picture, and not forget about occasional expenses, like spending more money around the holidays for gifts.
If you haven’t been in the habit of tracking your expenses so far, I recommend starting now, rather than looking back and trying to add up your spending in the past year unless you really need to. That’s just painful, you’ll hate it, and you likely didn’t have a spending system in place to make it easier for yourself. Try remembering back to last January and figuring out if that $20 esso charge was just topping up on gas, or if you bought chips and wiper fluid. If you’re super stoked about this you can look back on the past year, but if you would rather go get a brazilian then don’t martyr yourself, just start from today forward and you’ll be on the right track.
And you’re done!
If you follow these three steps you will start to inherently understand your personal finances, and managing your money suddenly won’t be the actual worst anymore. You’re not going to uncover anything scary in there that you can’t manage, and once you know how money flows in and out of your life THEN you can start to manage it, make changes and adjustments, and start to manage processes like saving, buying a house, taking vacations and not carrying the balance forward on your credit card all the time. BUT none of this can happen until you understand the flow of money in your life.
Want to learn more? Check out the show notes for these resources!
Join the free mini course I’ve created for you called the 7 day make friends with your money icebreaker challenge. This 7 day mini course will take you from being afraid of the dust bunnies in your bank account, to confidently managing your money and starting to save for your bigger life goals.
Click here for the Canadian income tax calculator I use
The best book to get started understanding your finances: The Wealthy Barber
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