Let’s face it, a lot of money passes through your hands during your earning years. We used data from Stats Canada to estimate that $1.6 million after tax dollars will pass through your hands during your earning years, and this is at the lowest end of the range. If you are in a 2 income household, this will double to $3.2 million.

Money management seems like a theoretical concept, that our eyes glaze over when we hear it. However, this is really just about how to handle your money. The better you handle your money, the more likely it is that you will have the means to experience the things that are essential to your personal happiness, and live the life you want. Good money management eliminates the pattern of living from paycheque to paycheque, excessive consumer debt, and inadequate funds on which to retire. Good money management means balancing savings, spending, wants, needs, cash flow and debt.

In this article, we will talk about how to start on the road to good money management.
There are some essential concepts that you must be willing to set up and follow. Many of these concepts are not new, we know them, but just don’t recognize their importance.

• Pay yourself first – save before you spend. Live and budget with the money you have, after you have saved
• Spend less than you earn
• Don’t be fooled by small expenditures – spending $7 for lunch each day is $35 per week or $1,820 per year. With that money, you could pay for a one week vacation cash, and not worry about the vacation bill when you get back
• Do not factor in Old Age Supplement, inheritance and lottery as part of your retirement plans. They are either inadequate amounts, or very unlikely to happen
• Become curious about money management – research the topic online, join online communities, follow good money management authors on Twitter, read money management articles in the newspapers.

Your first task is to understand how you spend your money. If you don’t do this critical step, you won’t be able to effectively analyze your spending patterns and make the appropriate adjustments.

How do I understand my spending patterns?

For most of us, our source of funds will be our earnings from either our jobs and/or our entrepreneurial activities (eg a small business). So here is how we start:

• Track every item you spend, but only for the next 30 days. No matter how big or small – keep all cash receipts, print out your online bank account and credit card statements, keep your credit card receipts
• At the end of the 30 days, sort all your spending into meaningful categories. Ensure you identify fixed costs (mortgage, rent, utilities, car payment) separate from variable costs. Total each category, and multiply by 12
• Compare this with your net take home pay for the year. Remember, net pay, not gross pay! Do not include credit card or line of credit funds you have at your disposal, because, as hard as it may seem, it’s not your money.
• At this point, most people will have 2 reactions –
1. Find a way to spend less than you earn, or at least spend exactly what you earn
2. Just give up, and say, it’s inevitable, they will have to spend more that they earn

However, irrespective of your reaction, you will recognize your spending patterns, and it will be embedded in your subconscious. Assuming you have the first reaction, immediately decide on how much you want to save.

Irrespective of what your values are, saving has to be a critical part of your money management plan. Sometimes people like to suggest 10% of your net pay. That’s a good start, but a good gauge may be to talk to a friend who has a company pension plan, and see how much they and their employer contribute to the plan. You can base your savings amount on that.

Next, based on your own personal values, decide where you will cut the excess. There is no right or wrong way to cut the excess. It is based on what is important to you. Can you move to cheaper or smaller house? Is a reliable Toyota/Honda more important to you than the Lexus or BMW SUV? Is entertainment more important to you than travel? Is having deluxe cable very important, and do you need the bells and whistles on your cell phone plan?

Next, can you increase your income with part time work? Be sure that this will not sacrifice the invaluable time that you must spend with your children. You should throw out any inhibitions you have about the sort of legal part time work you will do. The part time work may only be for a period, until you catch yourself up financially. Browse websites for part time jobs – companies like FedEx, Walmart, Loblaws regularly post part time work on their websites. Can you lecture, or teach a continuing education course? Is there a hobby that you have that you can turn into a money making enterprise?

Devising the budget
Now that you understand your spending patterns and your capacity (or non-capacity) to increase your income, it is now time to add another critical piece in your money management plan – the monthly budget.

Follow these steps
• Subtract the savings amount you decided on from your net pay
• The balance of your earnings is what is available for your fixed costs and your variable costs
• Once you have all the data, visit this site: http://www.mymoneycoach.ca/my_budget/budget-calculator-spreadsheet.html and use the budget calculator. I recommend this site, because it is interactive, compares your budgeted amounts to guidelines, and provides suggestions for improvement
• Your budget should be designed to align with your paycheque period

In our next article we will expand on budget design and maintenance.