from Joseph Pisani, National Manager of Franchising Services, Bank of Montreal.
In recent months the media has covered a number of stories on the overall decline in savings rates for Canadians to around 3% of disposable income and a coinciding increase in household debt to disposable income of 153%. Stories on these statistics are not new and have generally included a comparison with American households, painting our households as being more fiscally conservative.
The difference in the latest round is that the statistics for American households are now better – better saving rate and lower debt ratio. While interesting to read, it may be more interesting to compare your own situation with the average.
If you don’t know, it may be time to get a clearer financial picture and develop a budget. Sitting down and drawing up a budget is about as desirable as a root canal, but it is a necessary exercise if you wish to achieve your financial goals – such as debt reduction or retirement savings.
Step one: Figure out the ‘money in’ for your household. This should be a relatively straightforward exercise in adding up the money that came into your bank account over the last twelve months including items such as salary, commissions, and investment income. As you may have significant variability month to month, pick the lowest ‘money in’ month for budgeting purposes. Do not include money that is contingent on something like a performance bonus (use this money towards something that is optional like vacations, home improvements or extra savings).
Step two: If you don’t have a full year’s worth of paperwork, try gathering at least three months. Out of this determine what amount is attributed to fixed expenses, such as mortgage, taxes, utilities, loan or lease payments, and of course insurance. Then determine what amount is attributed to variable expenses such as food, fuel, child expenses, clothing, personal care, gifts and entertainment. Out of the total fixed and variable expenses determine a monthly average.
Step three: Subtract average money out from the lowest money in month – there should be a positive number. If there isn’t, you have two choices – make more or spend less. As you probably have more immediate control over spending, rationalizing your expenses and sticking a budget by category is critical to help you achieve larger financial goals of savings and debt reduction. Not sure if what you are spending is reasonable? A few guidelines to consider is that out of gross income total housing costs (mortgage, insurance, tax, utilities) should be limited to 30%, transportation at 12% and savings at least 5%.
The above sounds like a lot of effort because it is – but the fact remains that budgeting is proven to work. Fortunately there are some banks out there that have online tools that with a few clicks can illustrate what amount of money is coming in and what you are spending it on. I am pleased to say that BMO Bank of Montreal is one such bank with such tools as BMO Moneylogic. Tools like this are not only insightful it might even help you reach your own goals (perhaps even restoring our household financial picture over our American neighbours)!
® Registered trade-marks of Bank of Montreal.
Joseph Pisani has been in Commercial Banking for over 12 years. Joseph joined the Bank of Montreal’s Franchising Services Department in 2006. His past experiences include roles as Commercial Banking Account Manager, and operating a small business. Based out of Toronto, Joseph’s role as National Manager Franchising Services consists of identifying, developing and managing a portfolio of financial service programs aimed at facilitating financing and cash management products for selected franchise networks.
Phone: (416) 927-6025