Where Does My Money Go?

May 15, 2012

If you ask the average person what they spend all their money on, they’ll likely have trouble telling you. Bills, the kids, entertainment. At the end of the month, few people really know where the money went. The nearly empty bank account is eagerly waiting for the next paycheck to be deposited so that it can also vanish, as if into thin air.

If I were to ask you how much you earn, you could give me salary that you and your employer agreed on. But, be it $40,000, $60,000 or $100,000, the lifestyle will be right up there with the level of earnings. With the quest to own the nicest car, home and clothing that they can afford, people often lose sight of the future, and how the choices made today impact their quality of life later on.

You don’t Make as Much Money as You Think You Do
It’s hard to hear, and I’m sorry to be the one to tell you. But if you don’t believe me, look at your paystub. It tells a story. It shows you the amount of tax that is taken off at source, as well as your contribution for the Canadian Pension Plan (CPP) and EI. Do you belong to a union? Are you part of a pension plan? The details and their costs, are all there waiting to be discovered. The true amount that you earn, often referred to the net amount, is what you have left in your hands to spend after all deductions and taxes have been taken. A successful budget uses this number to determine actual annual income, and what percentage of that money is being spent on the things you need versus things you want.

Your Needs Versus Your Wants
Your budget can be broken into two categories: needs and wants. Generally speaking, your fixed expenses should be your needs and your variable expenses your wants.

Fixed expenses are the things that are necessary to live which are difficult to change over the short term: your rent or mortgage, heat & electricity and a basic amount of food and clothing costs. Variable expenses are everything else: the entertainment budget, eating out, and any indulgences. After going through a bugeting exercise, you become aware of what you can’t immediately change without longer term planning. This lets you focus on what you can.

To get a realistic picture of your expenses, first look at the amount on your paycheck that you actually take home. Compare that to your bills. You can quickly see which categories are eating up the largest percentage of your earnings. Or, you may find that your fixed expenses don’t make up that much of what you spend and you still don’t know where your money goes. A monthly budgeting exercise of simply tracking all your expenditures can open your eyes to the impact of lifestyle indulgences.

Debt & Savings
Not to be ignored, debt and savings need to be in balance in your budget as well. The interest owed on your debt is the premium that you pay to use someone else’s money before you’ve earned it yourself. Your savings, on the other hand, give you the chance to be the lender and have a bank pay you for the funds in the account which they can then lend to someone else.

Understanding where your money is spent is a crucial first step to the peace of mind that comes with a balanced budget. The clarity it brings can help you live a lifestyle that you can afford that will allow you to save to meet your goals, and have a promising future.

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