Alison Griffiths

“Help! I just found some beautiful beads. How much can I afford to spend? I need a budget!” This is the text message I got from my 26-year-old daughter and budding jewelry designer last week as she planned her Christmas gift making.

Apparently this apple did fall a little far from the tree, but I’ve been trying to coax her back into the financial fold. At least she recognizes that there’s no way to make a decision without some form of budget.

But I shouldn’t be too hard on my daughter as this question is a very common one among consumers. What they’re looking for is a magic answer about discretionary spending — the good stuff in life.

The affordability of essential spending is far easier to determine than its discretionary cousin, often called The Wants. The former usually involves set payment amounts, which slot handily into the expense column next to net monthly income.

The Wants are different. They’re irregular in timing and also in cost. Most know they can’t afford a luxury yacht but what about those knee-high equestrian style boots or that special tool for the workshop?

Unfortunately, you can’t say yes to anything discretionary unless you know how much must be spent each month on the essentials: food, rent/mortgage, utilities, transportation, children and so on. Some of what’s left over should be earmarked to pay down debt, for emergency, short and long-term savings and whatever remains can be spent on baubles and other fun stuff.

By the way, I put gifts in the discretionary bucket. Since the holiday season is fast approaching there’s no better time to get a handle on what you can afford to shell out for friends and family.

Of course, the very best way to fit seasonal holiday spending into a monthly budget is to set aside an amount from each paycheque. A colleague of mine has a different approach. She earmarks $1,000 of her tax refund for the holidays and stashes it in a 6-month, locked-in GIC. There’s no temptation to spend because she’d lose interest, however meagre, if she cashes it in.

But being proactive isn’t going to work for the few weeks left until this year’s holidays. It’s important to get some idea how much you can afford to spend without taking on more debt. So let’s do a few quick and dirty calculations. Call it Alison’s Budget Lite.

  1. Add up all your monthly essentials — don’t forget daycare, alimony and transit passes. Debt belongs here whether it’s car or credit card payments. The Financial Consumer Agency of Canada has a thorough budget spreadsheet complete with tips.
  2. Add up all annual or semi-annual obligations or expectations such as insurance, income or property tax owing, medical and dental expenses. Look at what you claimed on your last income tax for an estimate of the latter two categories.
  3. Divide No. 2 by 12 and add to No. 1. This is your monthly nut.
  4. Take 10 per cent of No. 3 and add it in also. This is your emergency cushion. Now you have your monthly nut plus emergency.
  5. Ballpark your monthly variable expenses, including groceries, gas and general household expenditures. Don’t forget seasonal household expenses such as gardening supplies. You are likely going to be wrong here so boost it by 10 to 15 per cent and add to the monthly nut.
  6. Add kids’ expenses such as activity fees, extras at school and summer camps. Estimate clothing costs too. Average them over 12 months and add that to your monthly nut.
  7. Now tackle savings. Whether you save regularly or make lump sum contributions, work out a monthly amount and add it to your running total. Don’t forget money going to TFSAs, RESPs, RRSPs or other savings accounts.

Is there anything left? Hopefully, the answer is yes. This then, is your available discretionary spending money. Granted, this exercise is budget lite. A more exact one requires analysis of at least three months of spending. Still, it will give you a rough idea about whether or not you need to pull in your spending over the holidays.

At a recent workshop I had attendees run through this process in just 30 minutes. There were many gasps and groans because the majority had a very difficult time coming up with accurate numbers for variable expenses — completely understandable.

The other reason for their distress was realizing how close to — or over — the line they were. No matter how painful, this is a very worthwhile thing to do before you plunge into the pressure filled days of holiday spending.

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