Kerry Taylor has always been good at saving, but when she started doing a budget 10 years ago she discovered all sorts of ways she was wasting money.
Her personal finance blog, Squawkfox, aims to make frugal living fun. But even she concedes budgeting was a lot of work at first. She had to figure out how much money was coming in and how much was going out, on housing, food, heating, power, transportation, phone, cable, clothes, entertainment and more. But once she and her husband Carl got going, it became a habit to save their receipts in a plastic bag and plug the numbers into a simple spreadsheet one Sunday night a month.
"It is really fun, you sit down and find the money leaks."
For many people, however, the initial set-up required for a budget is a bigger ordeal than doing their taxes and the idea of a monthly financial reckoning can be intimidating.
A poll released this fall by the Bank of Montreal found that only one in three Canadians set a budget and that even fewer review their spending every month. Yet, legions of financial experts insist a budget is the first crucial step to rein in spending.
Household debt, which does not include mortgages, has doubled over the past decade and is seen by some experts as a threat to Canada's economic stability. The savings rate has declined. In the recession of the early '90s, the average household in Canada saved $8,000, for a savings rate of 13 per cent. In 2010, the rate was 4.2 per cent, or on average about $2,500 per household, according to a study by the Vanier Institute of the Family.
At this time of year, many people assess how well they have met their financial goals. It can be a good time to start thinking about doing a budget. If the prospect is too daunting, consider taking baby steps, Ms. Taylor says.
She suggests documenting one area of spending at time.
"Grocery bills are a good place to start, because we spend so much money on food."
When she and her husband Carl first analyzed their grocery receipts, they were shocked.
"We found we spent $30 on olives in one month. Once you start tracking it you see places where you are horrified. That's the benefit. Otherwise you are out there in la-la land, where everything is perfect. It was at that point where we realized we could cut the cost. Do we really need olives? No. Woohoo! Thirty extra bucks. ''
They also realized that her husband eats a lot of bread, so they started stocking up on that at a bulk store, where it is cheaper.
"He could save $10 a month on bread. Already, that is $40 a month on two food items."
Once you have done food, move on to entertainment or other spending areas.
"That's how we did it. We rotated through it. We started with the grocery bill, but over time we looked at other bills as well."
Their phone bill was $35 a month.
"I phoned up the phone company and cancelled a couple of features I didn't know we had. That is another $7 a month saving."
Next was the cable bill. It was $70 a month.
"We cancelled it two years ago. Seventy bucks a month is huge."
But she says they went too far when they cut their entertainment budget to the bone.
"We were miserable. So cut the olives out and go to movie. Making simple switches can be fun. We stopped buying a lot of brand-name products and gear. We started buying a lot of stuff used."
Her blog offers many tips on how to save money and also a simple budgeting spread sheet. There are all sorts of smart phone apps or systems available.
"But they all require the work," Ms. Taylor says. "Your brain is the best budgeting tool out there. But you have to keep your receipts and you have to make the time."
The Financial Consumer Agency of Canada offers advice and a budget calculator.
Some personal finance experts, such as Gail Vaz-Oxlade, recommend putting money into separate "magic jars" for food, transportation, clothing/gifts and for everything else. But you have to do a budget before you can figure out how much to put in the jars every month. Her website offers a budget worksheet to figure that out.
Others have suggested putting savings into separate "buckets," because it can be easier to save for a specific goal, like a vacation, or Christmas presents, then it is to cut back on spending in general.
But when it comes to truly understanding your finances, Ms. Taylor says a budget is best. It helps you set financial goals and stick to them.
"We each max out our RRSPs (registered retirement savings plans) and tax-free savings accounts every year, so we know how much we have to put away for that every month. It is not magic. The money just doesn't appear. You have to make a concerted effort.''
She and her husband recently adopted a baby, so they had to redo their budget to start saving for their daughter's education.
"A budget is a flexible, living document that you have to re-evaluate over time. Interests rates may go up. Your mortgage may become more expensive over time. You have to account for that money somehow."
Ms. Taylor insists it can be fun, once you get into the habit of it.
"It is like a game."