Setting up a budget for a life event

Having a budget is key when planning a life event. So, let’s get started.

First, I can’t emphasize enough the level of importance budgeting plays in managing a positive cash flow. We not only have to budget for a life event, but must also ensure there are sufficient income sources to cover this cost, while maintaining, supporting or establishing a positive cash balance. Although we are looking at budgeting for life events, integrating our typical, recurrent, one-time and/or seasonal expenditures is the only way to succeed in achieving a positive outcome.

Sources of revenue

Identify all expected revenue streams in a year, such as employment income (gross salary less income taxes), dividends, interest, self-employment income, consultant fees and so on. It is important to use the total sources of revenue for the year, since the total includes potential income that may be seasonal or expected at different times, rather than weekly or monthly. The next step is to tally the total sources of revenue for the year and divide the total by 12 to obtain the income per month.

Expenditures/costs (used interchangeably)

It is important to separate expenditures between fixed (necessity) and variable (non-necessity), while including the budgeted cost for the life event. 

Fixed expenditures include rent or mortgage, insurance (home, health, and so on), groceries, basic clothing, utilities, transportation and health (prescriptions, dentist, glasses). They are considered the recurring and necessary costs for housing, safety, health and well-being. 

Variable costs include entertainment, restaurants, jewellery and expenses considered non-essential — more of what I call “luxury” items. These costs are separated from fixed expenditures because they can either be reduced or eliminated to either obtain a positive cash flow or until the demands of the life event have been met.

The budgeted cost for the life event is the total estimated cost discussed in my recent blog “Budgeting for life events.”

Items affecting cash flow

It is not only expenditures that have an impact on your cash flow, but other outflows such as debt payments, RRSP contributions, income tax instalments that may not occur monthly but will occur at some point during the year. These items must be included in your cash budget since they have an impact on your bottom line, resulting in either a positive or negative balance.

Formula

  • Identify:
    • all revenue streams and/or $ per month/stream = Total revenue per month
    • all current and expected expenses $ per month/category = Total expenses per month
    • any items affecting cash flow per month = Total debt per month
    • any and all cash balances = Total current cash
  • Result:
    Current cash surplus/Deficit = Total current cash + (Total revenue/Month x 12) – (Total expenses/Month x 12) – (Total debt/Month x 12)

If your result is a deficit, it may indicate the necessity of an adjustment to the expected date of the life event and/or the estimated cost of the life event, so as to reach a surplus prior to spending on the life event. It may also indicate the necessity of reducing or eliminating variable costs to meet the expectation of the budgeted life event.

If the result is a surplus, you’re ready to plan for the life event.

Take away for today

Cash is king! Budgeting for any life event does not only include the life event itself but an evaluation of your cash inflows, outflows and current cash balance(s). Most importantly, keeping track of your actual costs in comparison to your budgeted costs is a process that must be performed to remain on track. I do this for a lot of my clients, as well as develop budget policy, process and procedure for organizations. Budgets will assist you in ensuring you maintain a positive cash balance as well as responsible spending.

Keep the conversation going

What tips do you have on successfully planning a life event? Post a comment below.

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.


About the Author

Kathy Lempert, CPA, CGA


Kathy has a strategic and business advisory services consulting practice. Her experience in the aerospace, medical, real estate, pharmaceutical, telecommunications and manufacturing industries includes management of IT software development, treasury back office, development of policies, process and procedures, business process improvement, business plans and budgets. Kathy co-founded a charity in 2014 called Kehilla Montreal Residential Programs, whose mission is to provide a variety of affordable housing solutions that will help break the cycle of poverty. She has also served as a director on various charitable boards, including being treasurer of a large Montreal charity.

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