Beware the ongoing battle with budgeting

BUDGETING is a simple concept to grasp. We all understand that a budget is basically a plan so we don't spend more money on expenses than we earn.

But the reality is, budgeting is much more difficult than we likely realize. If it were as simple as spending less and saving more, Statistics Canada wouldn't be reporting year in and year out another increase in our personal indebtedness.

Since 1990, the average Canadian household's debt-to-income ratio -- a measure of how much we owe versus how much we earn in annual income -- has steadily increased to the point where, on average, a Canadian owes $1.40 for every dollar earned.

Mortgages account for much of that indebtedness and borrowing to own a home is good debt. But according to the federal government's Task Force on Financial Literacy, one in five Canadians feels they are "in over their heads" and no longer able to manage their debt loads. And 65 per cent of Canadians say their debts are limiting their ability to manage their financial goals.

Debt counsellor Sally Massey-Wiebe says budgeting is a lost art for many people. That is if they even learned how to create a budget in the first place.

"It is something a lot of people find difficult to do, and sometimes that's because they really don't know where to start," says the financial counsellor with the non-profit Community Financial Counselling Services in Winnipeg. "We hear quite often 'nobody ever taught me this,' 'I didn't learn this in school,' or 'my parents weren't good with money and didn't tell me how to do this.'"

While most of us could jot down our regular expenses -- the monthly mortgage payment, utilities, the car loan payment, etc. -- we struggle to nail down the irregular and discretionary expenses. And those are the ones that often throw whatever mental budget we've created in our head for a loop.

"You know that seasonal celebrations come up and the car needs to have a tune-up once a year," she says. "But we often don't plan for those because they don't happen every paycheque or every month the way our mortgage and our rent does."

More often than not, these 'unexpected costs' throw many people into debt, forcing them to use their line of credit for emergencies, even though if they took the time to think about it, they know these costs are coming and would save for them.

But just as challenging are those discretionary expenses. These are the things we buy with our surplus cash flow -- at least in theory. But in practice, it's often a different story.

"One of the most important things we have clients do is track their actual spending in order to get an idea of what they think they spend on food out, cigarettes, entertainment and all those things," she says. "That is their reality and a lot of clients are really surprised to see when they track where their money has gone this month, it's nowhere near what they estimated they were spending."

But discretionary spending is largely driven by our emotions, and controlling our emotions is no easy task.

"One of the reasons people have a hard time sticking to a budget is because it's a very cognitive process," says Monica LaBarge, professor of marketing at Queen's University. We can come up with a neat budget, covering every single expense -- a logical plan that will guide us to financial well-being. But pulling us in the opposite direction are our emotions.

"Even though we know that we should be making rational decisions, it's really hard for us to turn off that part of our brains that tells us that something makes us feel good so we should do it," says LaBarge.

And for better or for worse, we live in a consumer-driven society where we are surrounded by messages to spend our money on things that make us feel good.

"If you look at a lot of advertising, it certainly is related to emotions and what makes you happy," says LaBarge.

But you can't really blame marketers for being modern-day Svengalis, pushing our emotional buttons so we loosen our tight grip on our wallets, LaBarge says. It's often the nature of the products that determine the tone of the pitch.

"You can't sell Coca Cola by that fact that you need to have Coke as opposed to water," she says. "You have to sell the emotional part of it."

And let's face it. Emotions are unavoidable, and even the most frugal consumer occasionally buys on impulse.

But emotions that drive us to spend are not the only culprits that break our budgets. How we feel after we fall off the budget wagon also likely determines our future success with money management, says Sunghwan Yi, professor of consumer studies at Guelph University.

Yi has studied how the guilt and/or shame we feel after we purchase an item impulsively affect our behaviour. Although the two feelings may seem interchangeable, Yi says a psychology professor at George Mason University, Dr. June Tangney, theorizes they have some important differences.

"According to (Dr. Tangney), guilt occurs when we acknowledge that we made a mistake," he says. "You basically think that you are a wholesome person. It's just that you made a mistake."

When we feel shame, however, we tend to feel that there is something wrong with us.

"You think 'I was born this way,' which means 'I should not try to fix myself.'"

Yi's research found that people who feel a great deal of shame about their spending have difficulty preventing overspending because, unlike people who feel guilt but little shame, they are less inclined to take constructive steps to change their behaviour.

When it comes to sticking to a budget, the distinction between the two emotions is important, he says. If consumers are able to recognize these two emotions at work in themselves, they may be more likely to view an unplanned purchase as a mistake, rather than an irreparable defect of their nature, and take steps from having it happen again.

One step people should take is to ensure that their budgets not only reflect their rational dollars and cents calculations, but also their urges to spend for pleasure, says LaBarge.

"By being aware of what you want to do emotionally and not trying to fight that to an unreasonable extent, you're probably going to be more likely to stick to your budget."

It's a point Massey-Wiebe often has to impress upon her clients who are reluctant to start budgeting.

"There's also a fear that I'm going to be nickelled and dimed to death, and I'm not going to have any more fun with my money," she says. "That's not necessarily the case because a good budget needs to be flexible and include ability to enjoy some of the things that you see as priorities in your life -- whether you see that as buying coffee or going out for dinner."

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Republished from the Winnipeg Free Press print edition May 8, 2010 B12