Financial literacy and the art of budgeting
Black Friday. It’s become a pop culture phenomenon. In fact, it’s one of the cleverest marketing gimmicks of all time. For U.S. retailers, the Friday after U.S. Thanksgiving Day has typically been the day they become profitable for the year. In other words, their ledgers go out of the “red” and into the “black.” Some clever marketers seized on this as a way to create excitement and ramp up pre-Christmas sales. They called it “Black Friday,” promoted it like crazy, and watched the frenzied crowds mob the stores. It’s now even caught on in Canada. For most consumers, though, it’s often a case of “Red Monday Remorse,” the day you realize you’ve blown your budget out of the black and (deeply) into the red. And it hits you right in your wallet, purse, bank account, and credit card statement, in about a month’s time.
Is there any way to combat the overwhelming psychological onslaught of “Black Friday”? In fact, there is. It’s called a budget. And as November is financial literacy month, a budget is a good place to start learning.
I look at a “budget” more as a process, a means to an end. It’s not a strait jacket designed to punish you. It’s a tool designed to reward you. Because, bottom line, financial planning should be about the rewards. Now, during the holiday season, the temptation for instant gratification is almost overwhelming. Not only do we spend hundreds of dollars on useless junk for our families, but we typically also spend hundreds of dollars on equally useless junk for ourselves – which is just what retail marketers count on us doing every year. And we never disappoint.
The first place to start is to try to get a handle on where your money is going. Look at your bank statements. Document what you find. Next, perhaps again by consulting your bank statements, determine how much debt you paid off over the past year. Mortgages and credit card debt are the most important items to nail down. Now you can document exactly how much you saved, which can be earmarked for long-term investment purposes.
Now pull it all together. Take your total income and subtract the amount you saved, the amount you paid in taxes, and the amount saved for long-term investment purposes. The amount you spent over the last year is the number that is left. That is what you are spending – no doubt about it. It may be necessary to dissect it a bit more if you are spending more than you are earning.
The most common cash drains are vehicles and credit cards. The big thing right now is to pinpoint the problem areas. Beyond credit cards and cars – each of us seems to have one or two more areas in our life where we overspend. That’s okay – it’s your choice. The important thing is to be aware of the areas where you “overspend,” and decide if you are really getting your money’s worth. The Financial Consumer Agency of Canada has a handy budget calculator on its website to help you get started.
Think of the holiday shopping season as a war. Retailers do everything in their power to separate you from your money, with powerful inducements like Black Friday at their disposal. You have to put up a stout defense. And your best defensive tool is the budget process.
The budget helps you set goals and establish benchmarks. It’s what retailers do. Why can’t you do the same? For example, establish a fixed dollar limit for your holiday spending right at the outset. Do it per person, per family, per couple, any which way you like. But do not exceed it! It’s a psychological trick that forces you to plan your shopping, rather joining the maddened crowds in the malls and spending on impulse. Also, you can get just about everything online, usually at a good discount from a bricks-and-mortar location.
Another trick: Severely limit the use of credit cards. Use a debit card if you can. If you must use a credit card (online, for instance), or simply have to push your payment back for a month, use only one low-limit card. Leave the others at home when you go shopping. Then pay off the balance completely every month.
Learning to budget doesn’t have to be a painful exercise. It doesn’t have to be your enemy. Think of the budget as a means of tracking your progress towards your financial goals, and you’ll find the process a lot easier to bear.