How to budget when you’re living paycheque to paycheque
You already know the many benefits of skilled money management. The fact you’re reading this blog post says at least that much. Your challenge, like for most households, is how to navigate the seemingly infinite demands on your frustratingly finite income.
And the difficulties only seem to become greater the closer you are to living paycheque to paycheque.
Stress about money can affect all aspects of your life — from your relationships with spouses and children to your focus at work and your mental and physical health. The more you struggle to improve your focus in one area, the more distant your other goals become.
Licensed Insolvency Trustees see this sort of mental tug of war every day. Thankfully, we often also see people make meaningful progress just by taking several small but mighty steps every day. With just a little bit of planning and a commitment to putting in the work, you, too, can regain control and start creating a far more optimistic financial future.
Track your spending
The first step toward positive change is understanding how you’re spending your money. Commit to track your spending for at least a month, using whatever technique you’ll stick to and will keep these transactions at the front of your mind (e.g., keep receipts, log a spreadsheet, write in a notebook, etc.).
This will help you better understand where your money is going — and perhaps even spot some immediate cost-saving opportunities.
At the end of the month, set aside some time to review your transactions: Did you spend more than you earned? If so, you know you’re borrowing money to cover that extra spending.
How do your spending habits align with your values and goals? Are there any quick changes you can make in the month ahead to reduce your costs / reliance on credit?
You’re one step closer to being a skilled money manager.
Stop using credit
Step two admittedly takes a little more skill and a lot more self-discipline: It’s time to stop using credit.
This will be challenging if you found you were using credit to fund your monthly expenses and lifestyle during the tracking process. But it’s worth repeating that if you need credit to afford something that means you can’t afford it — someone else (i.e., the bank / credit card company / etc.) temporarily gave you the money and will expect repayment, with interest.
Cash is king. Cash forces you to prioritize your spending and get clear on your genuine values and needs. Many people find they spend less when they switch from credit to cash. There’s no secret and no magic. When cash is gone, it’s gone!
From a credit rating point of view, it’s generally preferrable to simply set credit aside and not use it. However, this also requires a high level of self control.
If you can’t do this, first understand that’s normal — but also recognize the short-term pain of closing your account may be worth the long-term gain of less debt and better money management skills.
Create a budget
Step three ties both ideas above into a neat and highly functional package. You can think of your budget as your financial control centre. It’s the heart and soul of your money universe, providing a full view of all income, expenses, and the best ways to spend for maximum impact.
Budgeting doesn’t have to be overly complicated, either. In fact, the best budgets are often also the simplest. Open a spreadsheet, download our monthly Budget Tracker Spreadsheet, or even just take out a lined sheet of paper, and record the following:
- All sources of income (e.g., employment paycheque, government benefits / subsidies, investment dividends, etc.)
- All monthly expenses (e.g., rent, utilities, groceries, insurance, etc.). Hint: Refer to your transactions from step one to make sure you’ve captured everything.
- All outstanding debts (include the amount owing, interest rate, and monthly payment)
- Savings information (i.e., How much do you have saved? How much do you want to save? How much do you want to set aside every month?)
The goal is for everything to total up to zero. That is: Your income less your expenses, less your debt repayments, less your savings, equals zero.
If this results in a number above zero, you’re not putting all your money to work to reach your goals. If it results in a negative number, you’re spending beyond your means and need to reduce your monthly costs.
How do you want to spend your money?
Your living expenses (rent, utilities, food, car expenses, etc.), are non-negotiable. You need to meet your basic needs. But the secret to the most effective budgets (and the most effective budgeters) is taking the time to really think about how you want to spend your money.
Is travelling important to you? Build in monthly savings amount towards a vacation fund — even if its just $5 or $10 per month at first. If dining out and attending concerts is important to you, allocate an amount towards entertainment that will adequately cover those costs.
Cutting your spending is hard work and this is what will keep you motivated when you encounter the inevitable bumps in the road.
Tackle the hard things head on
Every budget should always include contributions to an emergency / rainy day fund, and generous amounts to repay any outstanding debt.
For your emergency fund, you want to get to a point where you have enough to cover living expenses like rent, utilities, groceries, etc. for three to nine months. Build slowly, but consistently with small, achievable goals (e.g., $500 in the next three months, $2,000 in the next year, etc.).
For your debt, you need to be paying at least 1.5x the minimum payment to break the cycle of interest and see a meaningful reduction in the amount you owe. See our recent blog on debt repayment tips for additional strategies and guidance on how to do this effectively.
Reach out for help
If you’re unable to create a balanced budget, even after eliminating all non-essential spending, it’s possible the steps above won’t be enough to get back on solid financial ground.
Don’t continue the endless cycle of debt, and certainly don’t borrow from one credit account to repay the other. Instead, reach out to a local MNP Licensed Insolvency Trustee for a Free Confidential Consultation to discuss your options.
You may qualify for a Consumer Proposal, which can reduce the amount of debt you owe and help you repay your debts through a single, affordable, interest free monthly payment. A Consumer Proposal is a legal process, tailored to fit your budget. It ensures you can enjoy a reasonable standard of living (including enjoying the activities you love) and contribute to savings — all while making meaningful progress toward a financial fresh start.
Initial consultations are always local, always free, and you’re under no obligation to participate in any of the services MNP offers.
Other solutions you may discuss with a Licensed Insolvency Trustee include debt consolidation, credit counseling, budgeting tips and advice, and Bankruptcy. The Licensed Insolvency Trustee will review every option with you in detail, helping you weigh the pros and cons and a direction that makes the most sense for you situation and goals.
