Kick your budget into shape

By Walter Updegrave, senior editor

(Money Magazine) -- Question: What are the appropriate ratios in a family budget for expenses such as food, transportation, entertainment, etc.? I want to keep my spending balanced and need a guideline to do so. -- L. P., Chapel Hill, N.C.

Answer: The beginning of a new year is always an excellent time to focus on getting your budget under control. And considering the economic turmoil we've suffered through recently, many people see this year as an especially good opportunity to lay the foundation for a fresh financial start.

Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005)

Indeed, a Fidelity Investments survey of more then 1,000 adults late last year revealed that significantly more people planned on making money-related New Year's resolutions for 2010 than in previous years. The poll also found that saving more and spending less were among the most popular financial goals.

So how can you and others who want to get a better handle on your spending - and generally improve your financial health - best pull it off?

There are a number of ways to go.

One is to take your budget cues from what others do or, more specifically, use other households' outlays as a guideline for your own. To do that, you can check out the Bureau of Labor Statistics' Consumer Expenditures Survey, a program that tracks Americans' spending on everything from food, booze, clothing, and entertainment to housing, utilities, furniture, and transportation.

BLS provides a variety of tables that splice and dice spending in a multitude of ways, so that you can compare, say, your annual outlays for mortgage interest and property taxes to those of other homeowners or see how your entertainment spending stacks up against that of households with comparable incomes.

I question, though, the extent to which you should consider the figures in this survey as a target level for your own spending. For example, just because households earning between $50,000 and $70,000 a year spend about 5% of their income on entertainment, does that mean you need to cut back because you devote, say, 7.5% of your income to that area? Maybe your priorities are a bit different. Perhaps you feel it's worthwhile to spend a bit more on movies, theater, or vacations and less on fancy cars or electronics.

Besides, any time you're comparing one household's spending to another, you've got to remember that factors like the number of people in the family and their ages can sometimes account for a big share of any difference in outlays for different goods and services. That said, if your spending in any category is hugely out of line, that could indicate a problem. So you may want to at least reassess your expenses in areas where your expenditures are well above or below the average.

To get a broader sense of how your finances shape up, you might also consider checking out a few of the barometers that are commonly used to assess the health of one's finances. If you go to our What's Your Financial Health tool, for example, you can get an idea of whether the amount you're currently shelling out for housing payments and debt service jibes with what's considered reasonable for someone of your age and income.

This tool also allows you to see how you're doing in five other key personal finance areas. And when you've completed all seven sections, you'll receive a grade that reflects how well you're doing when it comes to managing your finances.

Ultimately, of course, the reason for gaining control of your budget is so you can save, both to achieve immediate financial security and to meet longer-term goals such as building a retirement nest egg. If revving up our Financial Health tool or consulting the Consumer Expenditures survey helps you do that, fine.

But you might think about going the opposite way - that is, putting the savings part first. You start by setting aside a certain portion of your salary for savings. You can come up with a percentage by going to our What You Need To Save calculator or by starting with a reasonable percentage such as 10% or 15%. If you can't handle that amount, then start with something smaller, say, 5% and work on increasing it later.

The key to this approach is putting your savings on autopilot. If your company has a 401(k) plan, sign up for it so that your savings are automatically deducted from each paycheck. If that's not an option, open an automatic investing plan with a mutual fund company and have money transferred monthly from your checking account to your fund account.

This sort of hands-off system has two beneficial effects. First, it makes it more likely you'll actually save than you would by having to make a conscious effort to put the money away each and every month.

Second, it makes budgeting decisions easier. Why? Well, if you're automatically siphoning off 10% of your salary for saving, you're essentially forcing yourself to live on 90% of what you earn. That enforces a certain discipline. Without as much cash flow to fool around with, you'll be less apt to indulge in extravagances such as a Statusmobile you don't actually need or a palatial home that you can't really afford.

And if it turns out you can't or simply don't want to spend less for certain things, well, that extra spending won't cut into your automatic savings and compromise your financial security. You'll just have to cut back on some other item in your budget. In short, by putting savings first, it almost doesn't matter how you divvy up the rest of your budget - provided, that is, that you don't do an end run around your budget by financing extra spending through debt.

But whatever approach you decide is best for you - whether it's reining in your spending via budgeting, managing it by putting savings first or a hybrid approach - get started on it now. The beginning of the year is a great time to break old bad habits and embark on a fresh start.

So why not make 2010 the year you really get that spending under control and put yourself on the road to true financial security?

Are you stuck in a lousy 401(k) plan at work but want help maximizing your retirement savings? Send us an email at For the Comment Policy, click here.  To top of page

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