Laurie Campbell, Executive Director, Credit Counseling Service of Toronto, Credit Canada visited to discuss her take on how to budget - preferring to call it a "Spending Plan" to make it less daunting - and outline how tying saving to specific goals makes successful budgeting more achievable.
STARTING A BUDGET
Step #1 Write spending down for 1 month.
Step #2 Figure out where wasting money.
Step #3 Set a goal.
Step #4 Create a bank account for that goal
SETTING GOALS (i.e.: pay down debt, save, education, retirement.)
We try to teach people to tie their money management with the concept of making goals.
Someone may decide that they need to budget so they'll bring their lunch to work every day for a month. At the end of that month they'll have a sum of money but they need to have some very specific goals about where they're going to put that money - is it to pay down debt, save, etc. They must review their goals monthly to see if you're making progress toward those goals.
So the #1 reason people find it hard to budget is because they don't tie specific goals to it. And unless we have goals there's no real reason to budget.
How to start a budget?
The first thing you need to know is where your money is going so for a month or two you need to write down what you're spending (not every single penny) to see where you're spending your money.
A lot of people have no idea what their expenses are. People don't open their bills so they don't realize how much things like heat and electricity cost - they've lost sight of how to manage money. People open bills because they know that they contain bad news but they don't actually want to know the news.
Once you make some decisions to cut down, E.G., not drive to work every day, not buy lunch every day, etc., you have to create a specific account to deposit the money you've saved into. It's a mistake to leave it in a general bank account - you'll spend it. So create a vacation account, house account, etc. If you can't spend it you don't miss it.
Set a date. Say, "by such and such a date I want to realize this goal. But make sure you're realistic about that goal.
We're seeing pay decreases and layoffs. As these things continue to happen people are going to be living on less and having to make some sacrifices - they'll have to smarten up. If they're in debt already they're going to be put over the edge.
People with decent incomes but are carrying credit card debt are living beyond their means - they're simply not managing their money. If you want to stop spending beyond your means and have money in your pocket you'll have to tie it to a goal.
Debit cards contribute to poor money management because people don't know how much they have in their account - you don't see what your balance is until you see your statement.
Laurie's not a big fan of taking money out and putting it into envelopes - the money is there physically so you'll spend it. She's also not comfortable with people carrying around large amounts of money.
Learning to budget is not going to happen overnight - it's like certain addictions - dieting. It's a habit so a lifestyle change has to be made. You have to find a way to make it fun and a new habit forming event.
You have to know your weaknesses. If you're a shopaholic don't go to the mall. And if your entertainment is going to the mall every Saturday you'll have to find something else that's fun for you to do.
Cut up credit cards - you only need one.
Bottom line is that you have to set goals. If you don't? You won't get anywhere.
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