One of the things I hate most when it comes to money is the concept of budgeting. What a horrible, spirit-dampening, waste-of-time practice. It's awful. Even for a numbers nerd like me.
That's why my wife and I reverse budget. It's quite simple, instead of counting all my spending and tracking receipts and such, we simply put away a fixed amount of money each month for 10 months of the year.
This practice generally means our bank account gets slowly bigger from March until June, goes down a bit during summer vacation, and slowly climbs up again from August until December. I like to make our TFSA contributions in January (front-loading) and RRSP contributions in February so it ends up all sort of evening itself out nicely.
It's great because I don't keep track of any expenses during the year. Sure we watch what we spend like we always have, but that just becomes habit. The biggest thing is we save religiously and always always pay off our credit cards each month. Being debt free is what allows us to save the way we do.
Starting to Reverse Budget
The hardest part about reverse budgeting is getting started. The saving grace is most people who care about money (even a little bit) do not spend what's not in their chequing account.
If that's tough for you, cut up your credit cards and switch to debit now!
If you don't save at all right now, but are getting through each month without accumulating any debt, start by saving 5% of your paycheque every time you get paid.
For starters, put the money into a Savings Account. Tangerine Bank and PC Financial offer no-fee savings accounts so they're a good place to start.
With each passing month, slowly ratchet up your savings by 1% of your net salary each time. You should target saving at least $562 a month ($260 bi-weekly) if you are 30 or younger. If you're older, do some Moose Math to figure out your minimum number.
Even if you are contributing to a decent pension plan, I would strongly recommend saving $5,500 a year to fill up your TFSA. That's $458/month or $211 bi-weekly. Having this extra savings is a great hedge against political dabbling in pension plan benefits.
Investing When You Reverse Budget
Once you have accumulated $5,000 in your savings account, open up a Questrade TFSA and transfer the money to your TFSA. I would stick with the RM Starter Portfolio when getting your feet wet; simply buy XAW.TO with every contribution. Once you have about $25,000, you can hold different asset classes and move to the RM Balanced Portfolio.
With Questrade, you can set up pre-authorized deposits so your saving is done automatically for you every time you get paid.
On Friday we'll talk about setting up automatic savings plans.