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“My Deficit is Right on Budget…”

Business and politics has a messy history together and for good reason when you consider the individual personal interests that are placed ahead of the collective populace on far too many occasions. Corporate bailouts, selective support of industries and regulations all have positive or negative impacts on each side depending on who is flexing their collective muscle more.

In the late fall Charles made a comment to me on the topic of national finances at the height of the credit cycle stating confidently in a humerous Jim Flaherty impersonation, “My Deficit is Right on Budget!

It was fitting that yesterday the finance minister disclosed that the anticipated federal deficit will be in excess of $50B for this current year. While he quickly took a moment to put that number into context as only 3% of Canadian GDP I have a difficult time gauging the true grasp the government has (in any political party) on the current economic impact of this recession.

In November there was “no deficit”, in December “there will be a deficit”, January brought a forecasted deficit of over $30B in the federal budget and now the number has ballooned to over $50B; or 3% of GDP. The problem, for Canadians and our businesses, isn’t the yearly deficit but rather the cumulative deficit we inherit before a surplus is eventually reached. Balancing the budget in 2014 won’t help much if the cumulative deficit we rake up is in excess of $80B (assuming sunshine on the horizon).

What lessons can investors take from this? Be diligent.

Personal finances are a crucial and important component of any wealth creating strategy. Having a budget is vital; staying within a budget is necessary. Governments have deep pockets (business and tax payers) to fix their mistakes. Investors and individuals have to look out for themselves and budget accordingly.

I made a comment today on themoneygardener when MG asked the question, “how much can we afford?” that touches on this subject with the importance of living within your means. Individuals can’t take deficits on like a government and in difficult times (such as right now) personal finances are vital for your financial success. With deficits spiralling out of control in all levels of government I urge individuals to take a proactive approach and show initiative in creating a flexible budget that considers multiple factors that affect your income and spending.

Don’t forget to contribute your questions to The Personal Finance Clinic which closes on May 31st, 2009.

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