“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it. Compound interest is the most powerful force in the universe. Compound interest is the greatest mathematical discovery of all time.”
I can help you yield this force in your favor instead of the favor of the government, banks, and insurance companies.
Have you ever lived with a budget? Does this very idea make you cringe? Have you ever tried to look at all those online spreadsheets or the one provided by your bank and said, “OMG!”
Relax, I got you covered. There is a very simple way to build a budget and it comes from your ACTUAL numbers, not the numbers you cannot remember correctly. Trust me, you a probably spending more then you realize if you use a spreadsheet.
The easiest way to analyze your spending is by first establishing all your fixed costs. These are generally easy to remember and find such as:
1. Your Rent/Mortgage payment
3. Utilities, if you are a home owner add school and municipal taxes here.
4. Fixed debt payments.
5. Savings plans such as RRSP, TFSA, RESP, etc
6. Anything else that does not change either monthly or quarterly, such as child support.
This part is usually easy and you can probably do it from memory because you can feel it each and every month. Do not add your credit card balance or payments in number 4. I know most people will think that, we will consider the credit card shortly.
Retrieve your last monthly bank statement, online or paper. There is always a starting and ending balance. I will propose an example to help demonstrate how to do this.
Starting Balance 500$
Ending balance 500$
Total deposits 5000$
Total Withdrawals 5000$
This scenario demonstrates that this person spends all the money they make. If we start and end at the same number, all the money that came in, has gone out. If you pull out the month prior to this and see the same thing or the month prior to that, it is safe to say you are living paycheck to paycheck. If out of your 5000$ total influx of money 2000$ was fixed expenses (numbers one to five above) you are basically spending 3000$ month on stuff. If you have a monthly savings plan, you get to subtract that amount and feel a little better about yourself.
Next, I would like you to tabulate all the money you owe, excluding your fixed debt payments, as we have already considered these. Now, try to remember how long you have that debt accumulated or since your last mortgage refinance. This will help determine your monthly shortfall. This is how we eventually fix your problem. Let us examine Scenario B
Starting balance 1000$
Ending balance 700$
Total Deposits 5000$
Total Withdrawals 5300$
Total debt 6000$ over 3 years
The situation here is quite difference, and potential more alarming. There person has spent more then they made this month, however, they also have a loan. After examining the last 3 statements, the trend is the same, we have a problem. How do we interpret this data?This person currently has 467$ shortfall per month.
This is how I arrived at this number:
300$ less then starting balance plus 2000$ per year (6000$/3 years). The total is 467$. This will likely result in this person to accumulate some credit card or line of credit debt. Our credit card and lines of credit shows us our monthly shortfall. If you take out your credit card statement and see since how long you have had it, it will likely demonstrate this to you.
If “Eyes are the windows into the soul.” The credit card balance is the window into your monthly shortfall. If you are in this situation and would like to get out, start with analyzing your numbers and try to understand why. We often believe it is due to a large purchase or large expense, and it may contribute to get the ball rolling, however, it is all the small, lifestyle expenses you have created for yourself that are truly hurting you.
I will never tell you to spend less, I will always say, realize the financial freedom you are delaying. If that daily 5$ coffee is worth 5 years to financial freedom, so be it. Or it can be the difference between a balanced budget or a monthly shortfall, you are now in the driver’s seat. You can no longer plead ignorance. They say, “ignorance is bliss.” Until it hurts! I can help you yield this force in your favor instead of the favor of the government, banks, and insurance companies. Next we will make a debt repayment plan that works!