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Join the wealth strategists of CIBC Private Wealth as they shine light on the topic of wealth planning by sharing their insights and ideas on how to use wealth in ways that are important to you—whether for your own needs, the people you hold dear or the causes that you care about.
Theresa Marx (00:07):
Hello and welcome to another episode of Wealth Planning Eliminated. I'm your host, Theresa Marx, a Senior Wealth Strategist at CIBC, Private Wealth in the U.S. I am joined today by my colleague Caroline McKay, also a Senior Wealth Strategist at CIBC Private Wealth. In today's episode, Caroline and I will discuss creating and maintaining a budget. In particular, we'll look at four steps that could help you with your budget, understanding your financial situation, creating savings goals, determining a budget method, and then tracking and monitoring your budget. Alright, with that, let's get started.
So Caroline, a common challenge we often hear about from a variety of clients is how to balance spending and savings. And it's not unusual for individuals or families really, no matter their income level, to find that their spending exceeds their income or that they have a hard time saving. So how do people go about getting this all into focus? Maybe getting this into getting to a place where they feel more comfortable with how they're balancing the spending and savings. So what should people be thinking about when they think about that and presumably start thinking about a budget.
Caroline McKay (01:24):
Right. And I think we've all heard the word budget and many of us will have different feelings about the word budget. Oftentimes people have this idea that you're being told to do something different than what you want to do, or it's like a stern taskmaster—you can only have the things that you want. Exactly. Your school teacher being like, no, no, no, you can't do that. But really a budget actually is there to help you. Really anybody who's doing one, get more of what they want in the long run by really being attentive to their spending and setting short-term and long-term savings goal. So budgeting is not just about looking at your spending and taking things away from you, it's really starting to think about how to prioritize what's most important to you, where are you trying to get in terms of your financial situation and helping you design a roadmap. So it's really a helpful tool. It shouldn't be looked at as a punishing mechanism, that’s not what it's intended to be.
Theresa Marx (02:28):
I really like that visual of it being a roadmap. What steps, what process are you following? So somebody that wants to put a budget into place, again, no matter their income level or their wealth level, what are the steps that they should take to really start putting that together?
Caroline McKay (02:45):
So the first thing you want to do is you probably spend about 30 to 60 days of actually reviewing your spending. So that's going in and your income sources. So what I'm going to do, and I choose to do this on an old school spreadsheet for me, when I've done this budgeting process, I find that when it's automated for me through a banking app or another type of app you can get online, I pay less attention letting the program itself. So I would highly advise, although those budgeting apps are great, I think it's a really great exercise to go through your credit card statements to go through your bank statements.
If you pay in cash to be keeping a journal of what you're spending and for 30 to 60 days really outline, where's your money going? So what's the money coming in? That's my income. That's going to be money I'm earning from work. If I'm self-employed, that's the money coming in from my self-employment. That's going to be my investment income, that's going to be gifts that I'm given. Any source of money that you have to spend, that's your income sources. And then I'm going to start looking at my expenses. And so that's my utilities, my rent or my mortgage, my groceries, insurance, and then that's the eating out. That's the fun things that I might want to do. And I look at those and I do divide them into what we call non-discretionary expenses. Those are the things that I have to pay every month to keep the roof over my head, to keep food on my table, to keep us insured and protected. Those are the have to pays.
And then the discretionary expenses is the other category. And that's the stuff again, that's my clothes shopping. I need a certain amount of clothing to keep appropriate in our society, but I also buying new clothes at this point is more of a luxury than a necessity. Dining out, subscriptions—I like the Hulu and the Disney and the Netflix. I have a problem with subscriptions! I like a lot of different ones, although I recently pulled back on a different one. So I feel like I'm working, I'm doing my budgeting. My club memberships, travel, and charitable contributions. So 30 to 60 days go through all your expenses to get a baseline of what's coming in, what's going out, and am I in a deficit? And if I'm not in a deficit, great, but where am I putting that additional money? Where's that going? Is that sitting in my checking account or am I putting that to work towards a savings goals?
Theresa Marx (05:29):
So let's say if you are in a deficit, what do we do there? Is that when we start cutting back on those discretionaries, those “wants,” if you will, to get us back in line.
Caroline McKay (05:41):
So what will be really important first is again, I have to have my baseline. I need to know what I'm working off of. Then what I'm actually going to do is I'm going to go through and create my savings goals because it's really important that we figure out for many people, that's the goal in doing all this budgeting is not only to worry, to worry about being in a deficit. Certainly if we're in the deficit, we have to figure out how to get out of the deficit, but we also want to know what is it long-term that I'm trying to do. And maybe your savings goal is “I don't need to save, I just need to not be in a deficit.” Then we jump ahead and go to looking at budgeting methods and figuring out where to cut. But first I would focus on savings goals.
Theresa Marx (06:24):
Okay, okay. So how do we do that? I mean, is it everything that we're looking on? How do we kind of think about setting those goals? I mean, I think sometimes as we're growing up, I have a goal to get into college, I have a goal to get a job. So they seem pretty basic, but savings goals I think seem a little bit more amorphous, if you will. It's hard to pin down, at least in my mind. So what should people be thinking about there?
Caroline McKay (06:50):
And I think a lot of our savings goals also, we wouldn't necessarily characterize as savings goals. We're not thinking about it that way. But for example, I want to upgrade my car in a couple years. There may be a savings goal tied to that, or I have to buy or lease a new car. I want to go on a trip to Italy next year or in two years. Again, I may not just have just money all around me to just be able to write a check for a $10,000 trip and call it a day. So those are the type of goals we're talking about retirement. That's obviously a long-term goal for many people. In some cases, maybe not. I've worked with clients who are in their fifties and maybe haven't prioritized retirement. And so it's not as long as it might be for somebody in their twenties. But we usually think anything outside of five years is more of a long-term goal.
The rest of it, maybe a vacation, a new car, paying down debt should also be considered a savings goal. So if I'm carrying a balance on my credit card or I have student loan debt, maybe again I have a longer timeframe to pay that off, those would all go into my savings goals. And we look at them, what I suggest is we write them all down all of our savings goals onto a savings worksheet. And Theresa, we have a worksheet available that we can share with clients. And you prioritize it based on, or you identify it based on short-term, medium term, long-term goal. And what we often suggest you do is then you figure out what is the goal amount that you're going to save and you actually break it into monthly chunks.
So let's say again, I want to save $10,000 for an Italian trip and I'm going to give myself two years to do that. I'm going to break that into 24 monthly payments. So that can be part of my monthly budgeting method is actually prioritizing and putting savings as part of almost like an expense on my budget. And we say the goal with savings is you want to pay yourself first before you pay other people your money, get what you want most out of it. And then we always recommend that there's an emergency fund. So if you don't have three to six months of living expenses, if God forbid you were to lose your job or something happened unexpectedly, you want to have access to money. So an emergency fund, if you don't already have one, should also be part of that savings goal and prioritized.
Theresa Marx (09:23):
So it's really thinking, I liked what you said, kind of thinking about as an expense. So as you're thinking about the subscriptions you're paying and the utility bills, there's almost like one more line item or a couple more line items. The trip to Italy, the emergency fund I still need to make sure is funded and the new car in five years or whatever. So almost thinking about it as those are line items as well. And I think that keeps you more focused as opposed to just, oh, I'm going to try to save 20% this year as opposed to, I think having real goals and allocating to those probably makes it feel more real.
Caroline McKay (09:55):
Definitely. And if you think about it, if I am in a position where I just don't have unlimited income and I am having to choose where I'm putting that money, whether it's, again, we already talked about the non-discretionary expenses, you don't really have a choice about that. Money has to go where it's going, but the discretionary expenses, my subscriptions, travel clothing, eating out, those are within my control. And if I am going to have to deny myself, I can't eat out 10 times a month, I'm going to say I can only eat out four times a month. It's helpful to know why I've denied myself that additional dinner out knowing that, oh, but I'm going to go to Italy in two years and that's why I'm going to prioritize that over an extra night out. Or I'm going to eat at home and just have a cocktail with friends. There's lots of ways to think about it so that you don't feel completely denied, but you also are focused on why are you putting your money towards a goal versus just spending it and let it go out the door, and not really remember why you were letting that happen.
Theresa Marx (11:00):
It feels more like a tradeoff rather than that denial, which I think is important.
Caroline McKay (11:03):
Exactly. Exactly. I mean, so much of this budgeting is psychology. How do we feel good about it and how do we stay on track? Because the budget is only good if we try to stick to it.
Theresa Marx (11:14):
We follow it. That's right. Okay. So once you understand your ins and your outs and that financial picture and you know what your savings goals are, what's the next step somebody should take to work on their budget?
Caroline McKay (11:26):
So then you're going to pick a budgeting method (and you can Google it). There's lots of different ways to think about budgeting methods. We particularly like what's known as the 50, 30 20 method. And that's where you're ballparking here. Again, you're going to look at what you've already tracked and decide how to fit this in for your lifestyle. But generally that means that 50% of your income should go towards your needs. Those non-discretionary expenses, 30% goes towards the discretionary expenses, the extras that you want. And at a minimum 20% should go towards those savings goals. And again, there may be times, especially if you have a lot of shorter term goals, that may be more of your money is going into savings. And again, this is completely adjustable, but that's sort of ballpark. So 50, 30, 20 method. And then you look at the tracking that you've done over the last 30 to 60 days and you see, okay, what do I need to readjust in my spending to try to meet those goals?
And again, a lot of people when they think about budgets, and you'll even see this somewhat online, when you look at how to do a budget, what you hear is income minus expenses equals the money you have left over to save. Right? I think the better way to talk about this is, and again this is going under the methodology of pay yourself first. You have savings goals, you want to meet them. The best way for success is to prioritize those. So the way I like to think about the budgeting method is I'm going to take my income, I'm going to prioritize my savings so that 20% mark that goes it. And then what I have left over is what's available for my expenses. And obviously that first goes to all my non-discretionary expenses and then whatever's left over there that is where I can allocate them to my discretionary spending.
And what I really like about this, and again, the tracking of spending for 30 or 60 days I think for a lot of people is insanely eye-opening because we just don't realize how your daily Starbucks coffee, how that can add up, it helps put a number on everything and it also helps you identify potentially easy ways to cut back on spending. But again, still keep the things you like. So for example, if I looked at all my subscriptions and I was like, that's a lot of money, I might be able to cut out one or two and just keep the ones I really want. And then if a show comes on that I am obsessed with and I have to watch a lot of times these subscription models, now you can log back on, pay for the month, binge watch what you want. And again, and there's a lot of little things.
I just recently went through a process where I renegotiated or I went back to reprice my homeowner's auto insurance, basically my p and c insurance, I realized the company I was with was hiking our rates. And when I looked back historically, it had gone up a lot and I decided to switch carriers and use somebody who was equally as good in terms of their reputation and the same sort of liability coverage. But I was able to save quite a bit the two companies. So this is a good opportunity. There's a lot of easy savings to be had by just reviewing what you're already paying for. And then maybe there might be some ways where you have to cut back a little bit, but again, you're only cutting back to then reward yourself for all those savings that you're trying to do.
Theresa Marx (15:09):
I think that's a really good point. I do think we all kind of get into the habit of things—and we just go along, especially when you're on autopay on a credit card or whatever. And so I think the taking the time for that 30, 60 days to really look and say, okay, what am I spending on? And as you say, where can I renegotiate? Where can I maybe say, okay, maybe I don't need all those subscriptions, or maybe I should be making coffee at home three days a week or whatever it is. But I think we all get into these habits and sometimes if we don't stop and think about it and take a look, we can get into a trickier financial situation.
So once it seems like that gets you to your budget, that really helps you see how you're moving forward. How do we use it going forward or how should we maintain the budget once we've put it into place?
Caroline McKay (16:00):
Right. So again, there are apps you can use to track your budgeting. I personally, again, appreciate a spreadsheet model because then it keeps you looking at your spending more physically. I also have in my own personal history have found in looking at my credit card statements more closely in all my spending, I have found issues where maybe I was double charged for something that I wasn't sure of, or my husband and I are both paying for the exact same subscription and we're like, why? We're double paying. So I like that method. And then on your budgeting worksheet, you can have your column for what your budget was and then month to month for at least a few months track, are you how your actual spending is going? Are you meeting that and regularly checking in with your budget, keeps it fresh in your mind of, okay, I said I was only going to go out four times this month.
Have I stuck to that? Right? Or I was going to spend X dollars. So it doesn't have to be lifelong, I don't think. Once you get into a habit, you can pull back and start saying, okay, I've gotten into the habit of sticking to my budget. Maybe I'll only check in with it every couple months. Or maybe I will then switch to a more digitized automatic budgeting app because I feel like I kind of know the process. So again, this doesn't have to be necessarily a lifelong looking through everything every day for the rest of your life. But I do think keeping your eye on the ball is very helpful, especially in the first six months to a year of doing this in place.
Theresa Marx (17:33):
And I would think it would also be important as maybe you have changes, so maybe your income goes up because you switch a job or you get a promotion or you have a child or you get married or whatever those life changes are. I would think that would be a prompt to say, okay, let me reevaluate this because now maybe I had different savings goals. Maybe I have different income. Really using those as props to revisit maybe that paper type of budget and get more stringent when those kind of events happen.
Caroline McKay (18:04):
Definitely. And we work with so many clients that when they have kids or they have grandkids, then they want to start putting money aside for education or having a baby and you have all these new expenses that you didn't have just a couple months before. And we have a lot of a ton of resources available that not only just address basic budgeting and savings goals, but also are very customized for, you're a new parent, you're getting married, maybe you're getting divorced, and your life situation is changing pretty dramatically from a financial standpoint. And that's a whole new endeavor too. And that's a really good time to be all also looking at spending your assets and a budget.
Theresa Marx (18:48):
Absolutely. Well, thank you. I think this was really helpful to me. As you said kind of at the beginning, a budget doesn't have to be a task master. I think it can really be such a powerful tool to help clarify finances, really think about how do we maximize our dollars, meet our savings goals, and really keep navigating our financial journey to put us in a really good position, not only today, but then as we go into the future.
Thank you for joining us for this episode of Wealth Planning Illuminated. We hope you found this topic interesting and that you will continue to explore the variety of wealth planning topics available to you on this channel. Thank you and have a great day.
Disclaimer (19:27):
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