Do you know your burn rate? If you don't, you should. Your burn rate is the amount of money you spend every month and in order to set yourself up for success, it needs to be less than your after-tax income.
To calculate your burn rate, all you need to do is use a simple and traditional budgeting process - and it really boils down to money in versus money out. Overtime your burn rate will change depending on your age, your needs, your lifestyle, and your choices so you will need to constantly adjust your budget as your life and financial situation changes.
What do you need to calculate your budget? It can be as simple as using a pen and paper and jotting down your money in on one side (income) and all your money out (expenses) on the other side. Then making sure you spend less than you make. We recommend you create a spreadsheet on a computer so you can make real-time updates and record your spending and budgeting patterns.
Below is a list of some of the items you will need to account for in your budget:
Identify All Sources Of Income
Total up all your sources of income including:
Your salary/income
Additional self-employment income from an extra job or hobby
Interest from savings account(s), investment products such as mutual funds, stocks, bonds, annuities, pension plans, real estate, etc.
Alternative sources - depending on your circumstances you may qualify for alternative sources of income from the government (local and/or federal) or even from corporations. If you are a student, look into scholarships and grants from local businesses, schools, universities and colleges, and even your relatives' place of work. If you are an entrepreneur, look also for potential grants from government (local, provincial, and/or federal), business development centers, or even from corporations and financial institutions.
Calculate your expenses based on after-tax income
Budget For Essentials 60%
Believe it or not, approximately 60% of your hard-earned income will go towards basic needs such as:
Housing & Utilities - home improvements, house cleaning, utilities, mortgage, maintenance, repairs
Groceries - highly dependent on lifestyle, diet such as organic vs non-organic, food preferences, waste (do you tend to throw a lot of food out due to spoilage?), delivery charges, bulk prices vs individual
Transportation - public transportation, vehicle own vs lease, financing costs, parking, gas, repairs & servicing, Uber and taxi, vehicle registration & license, tolls
Technology - phone & internet bills, computers, personal devices, headphones & earbuds, software licenses & subscriptions, music subscription
Clothing - work wardrobe vs non-work, lifestyle & hobbies, sports, seasonal, lifestyle, full-price vs reduced, fast fashion vs building a wardrobe that lasts
Budget For Non-Essentials 20%
Everyone needs (and deserves) to be able to spend their money on items they wish for ... after all, it's your money and you earned it! Be sure to limit your 'wants' and set a budget that makes sense for you.
Self-care - massages, spa, personal trainers, physiotherapy, gym memberships, hair, makeup, nails, remember to check for any self-care credits such as insurance benefits
Entertainment, Restaurants & Coffee Shops - movies, theatre, lessons, etc. Note - pay special attention to this category as these expenses tend to accumulate rapidly!!!
Hobbies - learning opportunities, lessons
Travel - budget for 1 full year of travel so you know how much you would like to spend on flights, accommodation, rentals, food, additional purchases
Gifts & Miscellaneous - birthdays, weddings, baby gifts & more ... gifts are often unexpected throughout the year so be strategic with your giving.
Budget For Savings & The Unexpected 20%
Spend 20% for your future and set yourself up for success.
Savings - if there's one thing the pandemic has shown us all worldwide, it's you can't predict the future. Saving money will help you become financially stable and provide a safety net in an emergency situation.
Repay your debts - debts cause stress and can wreak havoc on your health. Learn to make the most of your money & become financially secure.
Retirement fund - at some point in our lives we all look forward to the day when we can retire & actually benefit from all our hard work. In retirement, approximately 60% of your monthly income still goes towards your basic needs so you need to plan for your future while you are young as there may be new costs for things like extended care and medical expenses.
The Unexpected ... Your 'Rainy Day Fund' - see below ...
Budget for the unexpected. Everyone needs to have a 'rainy day fund' - an emergency fund that is kept for any unexpected expenses ... car repairs, a leaky roof, emergency medical bills, and more ... not to mention unexpected opportunities like a last-minute trip or special event.
So how much do you need in your 'rainy day fund'? Financial experts tend to agree that having at least 4 months' worth of living expenses set aside should help cover any unexpected costs that may arrive. For example, if your expenses are $3000/month, your budget for any unexpected essentials should be $12,000.
If you don't already have any money set aside for unexpected expenses, to find this extra money it's best to start small and work your way towards your fund. First, try setting up a separate high-interest savings account with no fees that is not attached to your daily debit card ... so you will not be tempted to touch it except for when you need it the most. Then determine how much money you can contribute every 2 weeks and set up automatic payments into your new account.
You may start out small with $50 bi-weekly and then eventually increase the amount over time until you reach your target goal. If you don't have an extra $50 that you can contribute every other week you will need to reanalyze your personal budget and cut out some of those lattes and specialty items from your shopping list!
Reduce Your Stress - All The Little Things
The bottom line is that if you learn to manage your 'money in' and 'money out', your everyday life may become a little less stressful, with a little less worry, and you will become happier with all the little things that make life more meaningful.
If there's one thing we have all learned from this global pandemic, it's acknowledging what is really important in life ... and sometimes it's better to slow down, and appreciate what we already have.
All posts are intended strictly for educational purposes. It is not intended to make any representations or warranties about the outcome of any product/service.
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