Failing to budget is budgeting to fail

DEAR Brenda: I don't think I'm a big spender but I seem to live from paycheque to paycheque. I know I have to have a budget but what exactly does that mean? I make a good income, I'm single and I like to go out with my friends and have fun. So how do I know if I am spending too much money on something like my car?

-- Clueless

Dear Clueless: You are not alone in being unclear on the concept of budgeting. For many, it's equated with dieting, and no one likes to be on a diet. But a budget is not intended to deny you what you like -- it is only an estimation of how you allocate your financial resources to meet your needs in order to have the life you want.

Think of your monthly budget as a pie -- a pie that is only as big as your net income (meaning the money you actually get after taxes and other deductions) and you only get one pie a month. You have to slice up your pie in such a way as to satisfy all your usual needs for the month -- everything from making debt payments to paying for your rent/mortgage, food, dining out, car, personal care and so on. But first of all, you need to "pay yourself first" by allocating a percentage of your pie to some type of savings, whether for emergencies, special purchases or toward retirement. Be sure to set up automatic transfers with your bank because what you don't see, you don't spend.

It is ultimately up to you how to slice up your pie but I like to use the following guidelines:

* Pay yourself first savings: 10 per cent;

* Debt repayment: 10 per cent;

* Housing: 25 per cent;

* Food: 20 per cent;

* Transport: 10 per cent;

* Entertainment/Leisure: 10 per cent;

* Personal Care: five per cent;

* Clothing: five per cent; and

* Communications: five per cent

The budget pie will help you determine what is reasonable spending in a specific category. If you spend more in one category, you have to spend less in another. If you have a one-time-only expense such as paying for a vacation or major car repair, then your goal is to be able to draw on your "spare pies" in the form of savings you have put away for that purpose. Otherwise you are borrowing from someone else's pie (i.e. the bank) in the form of credit cards, lines of credit or other loans, which will add to your debt-repayment category.

How do you keep track of your spending? I suggest you start with the old fashioned method of simply keeping and organizing your receipts (just empty your wallet every day and throw the receipts in a shoebox).

It is a good awareness exercise to spend a few hours sorting out all those bits of paper and adding up the totals either by hand or on your computer. Do this for at least three months to get a good handle on your expenses and start making adjustments to your budget and your daily habits when you are better able to discern your needs for a balanced lifestyle from impulsive or wasteful spending.

If you like using electronic apps, you can choose one of the many handy budgeting applications available for your device that help you keep track of your spending on the spot. But whether you go old school or new school, the key is to get started now on creating the budget that will be your plan for financial well-being.

-- Postmedia News

Republished from the Winnipeg Free Press print edition June 23, 2012 B13