Even with choosing an apartment, condo or house that is within your budget, and making nice Excel spreadsheets with your fixed expenses and earmarking specific amounts of money as projected ‘discretionary’, many of us still struggle with having money on hand for regular expenses. Me for example. I fully stand behind the max out TFSA and RRSP, give to charity, believe in real estate, etc etc etc. But when it comes to cash flow, one $350 visit to a local clothing store and a few movies can blow my budget before you can say my payday is way too far away. Further, I sometimes forget just how much(or little) I make each month, and then its back to semi-reliance on the credit cards. It is at this point that I introduce to you the basics of cash flow management:

Components of Income – Fixed Expenses – Discretionary Expenses – Taxes – Savings

Your income components: 

This can be your salary or your hourly wage, you income from self-employment as well as your income from your passive investments. You don’t have so much control over this, except if you can work longer hours, pick up a second job, or take on more clients as a self-employed person. Aside, it is a fairly fixed component.

Fixed Expenses:

This is what you are carrying every month in terms of your living expenses and any legal obligations (contracts like telecommunications or gyms) that you can’t avoid. You have to know this number, and this number should not be more than 50% of what you are making each month. If it is, you have a problem, and need to readjust something in your life.

Discretionary expenses:

This should not be blown in day 1 after your pay check. We should teach ourselves to spread this over our entire pay period. Our ‘wants’ or ‘fun’ expenses should not exceed 30% of our take home pay.

Taxes:

We all pay them. If you are lucky, they are deducted at source. If you are self-employed, do some tax-planning, as this could be an issue in the form of a big bill every June each year.

Saving:

You should save about 20% of your take home pay – this will get you in the habit of saving for the future, and growing closer to affording what you have set to accomplish.

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