Budgeting for success
By Diana Cawfield • Bankrate.com

Managing money is a skill, not an inherited gene limited to a lucky few. Like most skills, money management requires a bit of discipline and lots of practice.

Running out of money each month? Falling short on savings for a dream vacation? Trouble keeping ahead of credit card payments? If you can relate to any of these situations, we can offer some time-honoured strategies for taming debt instead of letting debt control you. We zero in on digging out of debt by using a budgeting strategy. Sure, budgeting may sound like a bore but enjoying the results of a debt-free life is anything but dull.

Step one: Know where your money is going

Unfortunately, most people don't know where their hard-earned money ends up. Uninspiring as it sounds, keeping a notebook and tallying up your daily expenses can be both a surprise and a powerful motivator. Most money experts agree it's the little expenses that suck the dollars out of your wallet, not the big living expenses.

Use a spending diary to help identify areas where you can dramatically reduce unnecessary expenses. Log your spending habits, and we mean every expense -- the daily latte, the glossy magazines, the fast-food lunches. Then, add up the cost of those expensive habits over a month, and then multiply those expenses over 12 months to see the full impact.

Tip: A daily savings of $2 in eating habits means an extra $730 a year!
You could take a vacation with that money instead of eating it.

Step two: Set in writing a realistic budget
Make a list of your fixed monthly expenses. They should include:

• rent/mortgage
• groceries
• telephone
• hydro
• automobile
• gas
• transit
• cable television
• lunches
• miscellaneous expenses (toiletries, snacks, dry-cleaning costs, etc.)
• entertainment
• insurance
• clothing
• credit card payments

Add up your total monthly expenses and total monthly income. If your expenses exceed your income, consider a lifestyle change to reduce your expenses.

Believe it or not, you can live without cable television until you've paid down your debt.

Or maybe you can share rides to work and split the cost of gas. These are just a couple of lifestyle changes you can make to ensure you stay within budget.

Step three: Plan

It's human nature to think you'll have more mobney next year. But not planning for the future could mean sinking further into debt. Plan for major purchases, vacations and emergency expenses.

Set down your financial goals in writing
Goals give you direction to realize your dreams. Establishing goals for the short-, mid- and long-term will help you realize your goals. But remember to be flexible, as your goals and wishes may change over time.

Write down your financial goals simply and clearly. For example:

Goal(s) _________________________
Estimated Cost _________________________
Target Date _________________________
Monthly Savings _________________________

Do this for short-term goals to be met within a year, mid-term goals you'd like to realize within five years and long-term goals you'd like to achieve in 10 to 15 years. Review your list periodically to keep on track.

Is there a dream vacation you would like to take? A new car in the picture? A home? If so, your monthly income and expenses budget will show you what money is available and how long it will take you to reach your goal. If your goals are specific enough, you will be motivated to cut down on your spending to reach those goals.

Step four: Reduce your spending
Now that you know where your money is going, the next step is easier. The money you can save by reducing the number of frothy coffees, magazines, lunches or whatever can be put to work in a fun-money savings account.

For many people, the biggest challenge in cutting expenses is meeting credit card payments every month.

• Cut up those cards! If nothing else, reduce the number of credit cards you have to one, selecting the card with the lowest interest rate. Every dollar in credit card interest you don't pay saves you money.
• Put a lid on new debt. Put away your credit card so that borrowing is no longer an option. Even when you know you deserve something, put your wish on hold until you have the cash to buy it.
• Pay cash. It's too easy to use credit cards and forget about next month's consequences. Paying cash for purchases is a powerful way to reduce impulse spending.
• Withdraw a set amount of money every week. It's an effective strategy to stay within your budget. By the end of the week, if you only have $10 left in your wallet, you'll think twice about spending any more.

Step five: Pay yourself first
When it comes to wealth-building, paying yourself first is a time-tested tool.

• By saving 10 percent of your income, you will realize the magic of compound interest. Set up a separate bank account for this savings plan, then watch your dollars grow. If your income is too low to save 10 percent, start by saving 5 percent of each pay cheque.
• An automatic pre-authorized savings account can be set up easily through your bank. Most people who set up an automatic savings program don't miss the funds at all. On the other hand, if you wait until the end of the month to see if you have spare money, chances are there will be nothing left to put away.

Further reading

• "The Automatic Millionaire" by David Bach. Recently featured on Oprah.
• "The Richest Man in Babylon" by George S. Clason. This gem is a classic for a good reason.
• "The Wealthy Barber: The Common Sense Guide to Successful Financial Planning" by David Chilton. Full of humour and practical advice.
• "Balancing Act: A Canadian Woman's Financial Success Guide" by Joanne Thomas Yaccato. You don't have to be a woman to glean practical tips from this book.
• And of course, there's more in Bankrate's Canada credit card channel.

Diana Cawfield is a freelance journalist and editor based in Ontario.