Friday, January 28, 2011

The "B" word is not a 4-letter word. (Budget)

I can't afford my rent... so how on earth can I budget?  Well my friend, if you really are in this much of a pickle you have to carefully scrutinize which of your (lousy) decisions got you here.  I must confess, I too often have trouble making my fixed expenses on a month to month basis, and no, it's not because I'm lousy at my investing, it's because I have my budget and I'm doing my best to stick to it.  So if I had a crappy month with no gigs then I'll have to make some sacrifices to prevent homelessness and keep the mouths at home fed.

I've watched a lot of crappy television programs about stupid people who consistently overspend, pay on credit cards, amass huge debts and then go on national television to humiliate themselves because they just want the $5000 cash reward.  Some people get it, most people don't.  The real problem is your attitude and your issues with self-entitlement.  If you find yourself saying "I deserve this..." Then you probably don't.  You're just looking for a quick fix to your moody-blues because your boss was crapping on you all week at work, or if you're like me you just had a killer work week and are so tired/exhausted/depleted that you need some kind of fix.

Always always stop and re-think your motivations if you're find yourself saying "I deserve it."  Not that you don't, but the trick is to make the money to buy it BEFORE you plunk down your plastic.  How does this relate to a budget?  Well, just like your parents (or perhaps grandparents) who survived any of the wars from the first half of the 20th century told you, "You have to SAVE."

Saving isn't hard.  It can be automated which is great if you have a 9-5 and get a steady pay-cheque.  The easiest way to save is to disappear 5-10% of that deposit instantly (into your investment account) leaving you 90% to have your way with any way you see fit.

A great way to "protect" this invested money (yes from your own damn sticky fingers) is to put it into a registered investment plan like your TFSA or RRSP.  (Fill up that TFSA first though... I talked about this before, and no doubt I'll keep harping on it again in the future!)  This way, if you want to make that "I deserve it" purchase you will have to make a phone call to your brokerage rather than just clicking with your mouse on your online banking.  This extra step of forced human contact will help prevent you from making a foolish mistake.

Now what if you don't have a steady job?  I don't.  I never have.  Everything is a contract basis and almost everything is a one-off deal.  I do have a few repeat customers but the regularity of the engagements is spotty at best.  This is why you have to budget.  So you won't be high and dry if you have a 3 month dry spell and are very tempted (or forced) to dig into your precious retirement monies.

Whatever you do if you are faced with this situation DON'T DO IT!  Seriously people, with compounding, every $10 you invest generates $1 of yearly income FOR THE REST OF YOUR LIFE.  (For those of you who are quick with math, yes, this is a 10% return after the nasty effects of inflation... so it's really a 12-15% average return on your investments... yes it's possible.  I'm averaging about 20% lifetime average so it's not unrealistic!)

So you have to start somewhere with your budget.  The trick is to start NOW!  Don't wait.  You can't afford to wait.  Every minute you waste now will cost you thousands of dollars when you retire.  There are general guidelines available on the web for how much you should save for a rainy day, for housing, for the dog etc..  Most of the recommendations are reasonable including the guidelines given on the TV shows that take great delight in revealing just how stupid broke people can be for the $5000 carrot on a stick.

The easy part?  The retirement savings portion.  The younger you are, the smaller a percentage it has to be.  The following chart will give you a VERY rough percentage of how much of your pay you should put away based on your STARTING AGE.  So if you start when you're 18, then you only have to put away 5% of your earnings for the rest of your life to assure a very lavish retirement.  (Even if you're working minimum wage!)

5% 18-20
6% 21-23
7% 24-26
8% 27-29
9% 30-32
10% 33-35
15% 36-40
20% 40-50

So if you wait, you'll have to pay WAY more of your budget to live comfortably during your retirement.

Now you say what if my union has a pension plan?  That's a great thing to have if you can VEST into the plan.  (If you don't vest, you don't get the money)  Vesting requires you meet a certain minimum number of union engagements in a certain time-frame.  However this doesn't mean you can run straight to the bar and down the extra money you don't have to invest in Jagermeister shots.

It means you can round down a percentage point or two from your investment savings.  I wouldn't cut more than 2% though since you don't know what's going to happen to those pension plans.  Legislation might change and they may reduce the payouts or who knows what.  What I'm trying to get you to do here is to be self-reliant and take responsibility for your own life rather than hoping somebody will call you with the next gig.

General guidelines
30% housing (utilities INCLUDED)
20% travel (car, insurance, parking, bus pass, taxi)
25% life (food/clothes/vacation/ipods/cell phone plans)
10% retirement
15% debts/emergency/vacation/other

If you're an urbanite your travel might be way lower so it's ok to go with 50% of your income to housing/travel.  Just make sure the sum of all that stuff is no more than 50% of your income or you won't be a happy camper...  Having a nice place is nice, but if you can't afford food because of your crippling rent you have to re-consider.  You don't have money to go out so you have to stay at home, so your home can start feeling like an expensive cage.

Now there's a problem if you're like me since every cheque you get is PRE tax and this handy reference guide is your POST tax income.  So you have to guess as to how much tax you'll have to remit and save that too!  So what this really means is you have to re-jig your numbers a bit to incorporate this extra savings bucket.

Since I make have consistently made an abysmally low income every year I don't have to save much for tax.  Also being "self-employed" as most performers/musicians/artists are you'll have many more tax deductible goodies you can claim to bring down the taxable portion of your income.  (The amount of money you have to pay tax on.)  Watch out though!  If you're having a good year, make sure to save some extra money for the tax man, or you'll get a NASTY surprise when you file your tax return.

The hard part is getting this savings rolling.  The first few months are critical  If you find yourself having 3 good months in a row you feel like rewarding yourself.  Reward yourself with a safety net!  If you do, (baring a huge devastating financial disaster like when my computer hard-drive croaked and I had to pay way too much to get the data recovered) it all starts to get easier.  If you have a crappy few months, you can dip into your emergency funds to cover your monthly expenses.  Then when work picks up again, your emergency fund recovers and is primed for your next inevitable shortfall.

After you've kept this ball rolling for a year then you'll have peace of mind, a buffer to get you through crunch times and a realistic appreciation of what you can actually afford to reward yourself when you're feeling blue.

Next time: diversity, adversity and easy slip-ups.

Disclaimer: By having read this blog you dismiss any liability I have in your investing failures.  Just remember if you do ANYTHING based on ONLY my advice, you're an idiot.  Do your homework and if you're looking to place blame for your uninformed horrible stock picks you have to only look for the nearest mirror.  My opinions are exactly that: MY opinions only.  They might be right for you, or they might not be.  I have winners and losers and my goal is to help you understand where I went wrong so that you don't have to.  If you crash and burn, lets get together for a beer to commiserate our losses and plan a new attack.


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