Thursday, May 17, 2007

Personal Budgeting

As a financial planner I meet many different types of people, single, married, with children or without, seniors, and anyone else you can think of. Everyone has a different personal budget it seems whether its a conscious choice about how much they spend money in different categories or a 'fly by the seat of the pants' approach which is also a budget of sorts - its just really short term budgeting!

As a general rule, when I find people are in financial trouble, it is likely I will find overspending in some categories and a general lack of savings to help smooth out life's bumps and irregularities. This can be a habitual problem with many people - they spend too much and don't save enough. Many times I recommend that these people start a more rigorous budgeting procedure and a more disciplined approach to spending and consumption.

I was curious as to the average Canadian's budget so I dug up some StatsCan data and put it into a chart. The numbers are for 2005 - click to enlarge.

Generally speaking, Canadians don't save enough and they pay a lot in taxes.

And for interest sake here is my personal family budget.

I know the categories aren't the same but it is interesting to compare. I would roughly fall into the "Couple with Children" category. I spend significantly less on taxes, food, and transportation than average. I also invest and donate far more than average and I pay more on my mortgage than average. This is likely because 1) I live in the most expensive real estate market in the country and 2) I have a very short amortization period. Other differences are that I don't gamble or smoke and I don't have any education expenses.


mohican said...

A distortion in my budget is the 'transportation' category. I paid cash for my vehicle so if I averaged that expense out over the number of years that I own it the category percentage would be larger.

Anonymous said...

How do you get away with 15 percent taxes? Got a secret?

mohican said...

The charitable giving and RRSP contributions are the secret. Not really a big secret.

The charitable giving alone results in a tax savings of roughly $5000 per year. Remember that charitable donatoins earn a tax credit at the highest tax rate (approx 50%) rather than at your marginal tax rate.

Last year my wife and I paid less than 10% of our income to income taxes.

mk-kids said...

mohican - can you provide any more info, basic info on how charitable donations & rrsps work? how do those contributions affect the money in my bank account in the short term? don't rrsp deductions simply defer your tax payment (ie: you don't pay now, you pay when you cash them out?). i am recently married & my husband & i are really in the dark about taxes/ rrsps/etc... are there any books you can recommend (money management for dummies?)

mightymouse said...

Uhh... I don't see the piece of the pie that accounts for savings...

mohican said...

mightymouse - the 14% allocation in the pie for "Investments" is our savings.

mk-kids - briefly regarding charitable donations and rrsps

1) donations receive at tax credit of almost 44% - meaning that a $1000 donation earns a $440 tax refund - I'm oversimplifying but the point is made.
2) rrsp contributions earn a tax deduction at your personal marginal tax rate and the earnings are tax deferred until you withdraw - perhaps at a lower tax rate - the tax deferral is the main advantage but the tax deduction results in a current tax savings which I use to invest or pay down my mortgage, etc. This magnifies the effect of the tax savings.

See the tax calculator link at the top right of the main page.

There is actually a book called Personal Finance for Canadians for Dummies! Its fine.

patriotz said...

Must-read article in the NYT - contrast with Mohican!

Couple Learn the High Price of Easy Credit

Can anyone deny that US is going to face a nasty day of reckoning? Do you think there will be no effect here?

Anonymous said...

So, I'm curious, looking at your pie: what is considered then a reasonable amount to devote to mortgage, insurance, property taxes for pre-tax or after-tax income?

mohican said...

nokem: I would consider that 30% of gross income is a 'reasonable' percentage to devote to housing costs. That includes mortgage interest, principle repayments, property insurance, strata fees, maintenance, improvements, and utilities.

I should also note that the total amortization of my mortgage is 10 years - I have approximately 6 years remaining.