Take charge of your finances

Financial Literacy Week 1: Start with a budget

Karen Wallace 7 November, 2019 | 1:37AM
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Ruth Saldanha: November is Financial Literacy Month here in Canada. And the theme for this year is take charge of your finances. The goal is to encourage Canadians to take charge by making a budget, having a savings and debt reduction plan and understanding their financial rights and responsibilities. If you have no idea where to begin, don't worry, there's help. Karen Wallace, Morningstar's Director of Investor Education is here to help get us started. Karen, thank you for being here today.

Karen Wallace: Thanks for having me, Ruth.

Saldanha: Let's start with budgeting. Why should I care to budget?

Wallace: Well, I think, budgeting helps you be mindful about your spending. You work hard for your money and budgeting kind of helps you attach some priorities to your spending, so you make sure that you're putting your money toward the things that are most important to you.

Saldanha: Is it very hard to budget?

Wallace: I don't think it has to be. I think you can make budgeting more complicated if you want to, but I think really what I recommend to sort of be at the core of your budget is, especially for young people who are sort of just starting out on their own, financially maybe they're moving away from a situation where their family provided most of the cost of housing and utilities and things like that. Make that be the core of your budget. Make some line items. What does it cost? What does my rent cost? What does it cost to keep the lights on? What does my insurance cost? Things like that should be definitely the core. That's called your non-discretionary spending. And then, really, the stuff that's left over – budgeting doesn't really need to be about denying yourself. It's more about like, what do I have – what are the needs that I have with my money, and then what do I want to spend my money on, what's most important to me?

Saldanha: What are some of the things that absolutely should be in a budget? And how should I create one?

Wallace: Well, I mean, there are some free templates in Excel, in Microsoft Excel that are pretty good. And I've used them myself. You can make one yourself, just a spreadsheet. There are sort of online software that you can use as well if that interests you, if you want to use like an app or something like that. But, I mean, you can do it using pen and paper, really. It's probably easier to do it on the computer just because you can update the document more easily. But really, what should be at the core is those things that you don't really – you can't skip your rent payment, you can't skip your utility payments, things like that. That should really be at the core. And then, the rest of it, it's retirement savings, that's important to me. I'm going to carve out a little piece of that. That's Just ensures that you don't so many expenses going out the door that you're using credit cards and things to cover things – like you really just kind of want to make sure that you know what is the core expenses that are just nonnegotiable. You have to pay these.

Saldanha: We talk a lot about emergency funds here at Morningstar. What are they? Are they important and should they be a part of a budget?

Wallace: Oh, sure. An emergency fund is very important. And when you're first starting out, or if you have sort of a lot of high interest rate debt that you're paying off, as much as you can put into an emergency fund, maybe like $1,000 even and what it does is it helps you from having to use your credit card to cover emergencies and credit cards are really expensive way to pay for things. If you need to travel unexpectedly, if you have an expensive vet bill, if you yourself have sort of like an expensive medical problem, having that money set aside can give you peace of mind that you're not going to just have to go deeper into debt to deal with something that comes up like that.

Saldanha: Karen, thank you so much for being here today.

Wallace: Thank you, Ruth.

Saldanha: Next week, Karen will be back to talk about goals. For Morningstar, I'm Ruth Saldanha.

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Karen Wallace

Karen Wallace  Karen Wallace, CFP® is Morningstar’s director of investor education.

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