Create a budget that really works

Check out these easy steps to financial success, plus how to deal with three budget busters.

By Anne Bokma

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Even though your paycheque seems to pull a Houdini act and disappear just days after being deposited, you may be loath to sit down and actually figure out where all your money goes. Instead you'll bemoan the high cost of living, endure moments of panic and hope that soon your barely existing bank balance will magically grow. But the real trick to saving more is to create a budget and stick to it.

Laurie Campbell, a program manager with the nonprofit Credit Counselling Service of Toronto, compares budgeting not to sorcery but to dieting. It requires careful planning, can feel restrictive at times and may take a while before you see results, she says. But just as when you drop a dress size, when you lighten your debt load, you feel great.

So if your money has a habit of slipping through your fingers like a magic coin, here's a simple four-step process to help you keep on top of your spending.

1. Establish a savings goal.
If you're going to go on a diet but have no idea what your ideal weight would be, why would you bother dieting in the first place, asks Campbell. Similarly, the first step toward creating a budget is to set a goal: it could be putting away a fixed amount in your RRSP every year, planning a kitchen reno or paying for your child's braces.

Or maybe you've used $15,000 on your line of credit and you want to pay it off in two years. Your goal would be to apply $625 toward that debt every month. Setting a goal lets you keep your eyes on the prize. "It's the entire reason for the budget and keeps you motivated about saving," says Campbell.

2. Track your spending.
This is the time-consuming part. For a month or two, you and your spouse should each write down every single cent you spend -- from the 75-cent newspaper you pick up on your way to work to the bag of chips you buy at your kid's hockey practice. Add it all up at the end of the month and apply this total against your net earnings to see if -- and how much -- you may be coming up short.

Nine years ago Audrey Hensen, 44, and her husband, Rick Hughes, 46, created their first budget to finance Audrey's 4-1/2-year leave from her job as a teacher, so she could stay home with their three children. The couple bought a simple accounting book and divided their expenses into various categories -- fixed costs (such as mortgage payments and car insurance), household expenses (such as utilities), food, clothing, discretionary spending, etc.

If you want to go the high-tech route there are software programs, such as Intuit's Quicken and Microsoft's Money, that allow you to track expenses, or you can simply log everything onto an Excel spreadsheet. Do what works best for you.

To track daily expenses, stick a Post-it note in your wallet and jot down all your purchases. Then transfer them to a notebook or software program once you're at home.

Page 1 of 2 -- Discover more great tips to creating a budget on page 2.

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