Mastery of money is built on understanding the interplay of income, spending and saving. For some people, a budget is a helpful part of the process.
Not me, mind you. I use a different system of having money automatically transferred for savings and bill payments each time I’m paid. What’s left, we spend. Budgeting does work for many people, but it’s often more complex than it sounds.
For example, a reader recently asked for help in deciding how much of her household’s income can be used for discretionary spending each month. “How many ‘treats’ or extras does one award oneself? Are new sheets and mattress toppers for the kids rather uncomfortable beds a necessity or a splurge? Is fixing the broken front step and other landscaping needs a priority or a ‘wait ‘til later’ item? If you can offer any advice or guidance, I would be most grateful!”
I’m turning to readers of the newsletter for some thoughts on this. Send them to me at rcarrick@globeandmail.com Here are some numbers supplied by this reader:
- Net income of $10,000 per month
- Housing related costs of $3,100 per month – mortgage, property taxes, utilities
- Food for the family costs $1,500 per month
- Vacation savings of $1,500 per month
- Debt payments of $1,500 per month – a consolidation loan covering various outstanding debts
Among her questions are how much she should contribute to a group registered retirement savings plan at work, and whether she should be doing anything else with her monthly income.
Based on the numbers above, she has $2,400 per month in net income available after meeting basic costs. Contributing to the group RRSP sounds like a must because these plans typically involved matching money from employers. If this family doesn’t have a Plan B fund for emergencies, it’s a top priority to start building one gradually.
As to treats and extras, what about setting aside a few hundred dollars every month for an “extras fund” – money that can be used for repairs to the front steps (sounds like a priority, if only for safety).
As for the new sheets, that kind of sounds like a necessity and not a luxury. I once read a personal finance blogger make a case for splurging on a great mattress because of the dividends it pays in letting you sleep well. The same should apply to sheets, right?
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Rob’s personal finance reading list
How much should you have saved for retirement at ages 20 through 60?
The Savvy New Canadians blog provides some guidance on retirement saving through the decades of your life. Lots of suggestions on how to get your retirement savings on track if you don’t think you have enough put away.
Canada is running out of land
Why are houses soaring at a pace that is way ahead of income growth? One answer is that not enough houses are being built in urban areas. In fact, some cities are running out land for building single-family homes. “I’m hard pressed to think of any major global city where a single-detached home near the core urban area is affordable,” an economist says here.
How hot housing hurts renters
In Brantford, Ont., landlords are taking advantage of rising house prices to sell. There’s such a scramble for rental units that bidding wars are breaking out. Yes, bidding wars for rentals.
Best and worst loyalty programs
The blog post names names – the best and worst drugstore loyalty, travel and hotel reward programs. Aeroplan over Air Miles.
Ask Rob
Q: You’ve consistently pointed out how important it is to have bonds in one’s portfolio in spite of the fact that, in some cases, after paying taxes, one loses. I don’t think I’ve heard you talk about substituting some of those bonds with preferred shares. Wouldn’t preferred shares be a reasonable alternative to bonds?
A: My take is that preferred shares are not a bond substitute. Bonds take the edge of stock market declines – that’s the main reason to hold them. Preferred shares have been hit very hard in the past two stock market crashes. Now, if we’re talking strictly about generating tax-efficient investment income in a non-registered accounts, pref shares do have advantages over bonds thanks to the dividend tax credit.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
This calculator helps you measure the performance of your portfolio compared to relevant benchmarks.
The money-free zone
Call me skeptical of a new development in food technology – the vending machine dispensing hot pizzas. There’s one in Ottawa, where I live, and Rome has them, too. Anyone recommend trying this?
In case you missed these Globe and Mail personal finance-related stories
- The five deadly sins investors should avoid
- The reality check every stock-picking investor must confront, and the sooner the better
- ‘I am frozen’ – an investor who missed the surge in stocks wonders how to get into the market
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Are your parents giving you money? • Why it’s time to stop shaming the renting lifestyle • Is now the right time to buy a house? • Why are young Canadians leaving the cities they love? • Eating in: How COVID has shifted our food spending • Crisis-proof your finances? • Can you afford to live downtown? • The cost of kids
- ✔️ The housing file: The housing boom is ripping apart the financial fabric of Canada • Shut out: A well-qualified millennial home seeker throws up his hands after losing multiple bidding wars • Big city housing affordability is over – now what? • She sold her Toronto house to retire somewhere cheaper, but it didn’t work • How young adults and the whole country win with a tougher mortgage stress test for home buyers • Can’t afford your house? It’s likely not your fault
- 📈 Investing: Robo-advisers have grown out of the novelty stage. Here’s help in finding one right for you • The 2021 ETF Buyer’s Guide: Best Canadian equity funds • The 2021 Globe and Mail online brokerage ranking: Who’s best for investing … and answering the phone • Are these the stock market returns of a lifetime? • On the cusp of retirement and wondering about an ETF that pushes the limits on aggressiveness
- 💰 Your money: The five most important numbers for checking the health of your personal finances • Today’s freakishly low mortgage rates can’t last. What will pandemic home buyers do when they rise? • There’s a cost in money, isolation and family stress when seniors choose to remain in their own private homes • Taking CPP early can cost you $100,000 and limit your long term options • Fleeing the city for the suburbs? Watch out for higher property taxes, more cars and other costs
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
