No magic formula

Why not get one of your dreaded New Year's resolutions out of the way before the ball drops and begin a budget today? Without one, how do you even know how much you can afford for champagne, or anything else for that matter?

The sticking point for many budgeters-to-be is that they have no idea how they spend their money.

Before nailing down a budget, most financial advisers -- whether meeting with a big-bucks client or someone living paycheck-to-paycheck -- suggest beginning the process by tracking monthly spending.

"You need a frame of reference," said Brian Jones, a financial adviser and author of the book "Getting Started: The Financial Guide for a Younger Generation."

He suggests tracking your money-spending habits for two months using pen and paper or a computer program such as Microsoft Money or Quicken.

It's not a fun exercise, but without knowledge of your spending habits, you're setting yourself up to fail.

Just ask Duane Emmel, a financial counselor with the Village Financial Resource Center (www.helpwithmoney.org). He's seen plenty of people who craft a budget using guesstimated expenses. Then when the going gets tough, they "crush it up and throw it away" instead of tweaking it.

They come to him and say "give me the secret formula, Duane." But he's not aware of one, and neither am I. (If you know of one, be sure to let me in on it).

There are budgeting rules-of-thumb for everything from food to clothing, but they're a far cry from a magic potion. Typically, Jones and Emmel don't mention them to clients because they're far from gospel and too many people take them as such.

But I know you're curious, so here's an example from Power Pay (www.powerpay.org), an online budgeting and debt payoff program designed by Utah State University's extension service.

Power Pay suggests that housing should eat up no more than 35 percent of your take-home pay, including insurance, taxes, utilities and supplies. Yet that ratio is unrealistic to many living in New York City and the West Coast, or even Minnesotans who bought at the peak of the housing market.

At first glance, I should be celebrating because my housing takes up about 26 percent of my take-home pay. But wait! Child care -- a category they don't even include -- costs my family a whopping 30 percent.

Anytime Jones, 33, sees clients with a mortgage obligation topping 50 percent of their after-tax income, he cringes. "Be careful with what your lender is telling you versus what you can afford," he cautions.

Emmel's housing comfort zone is closer to a third of take-home pay. Whenever he sees a client with total debt payments -- mortgage, student loans, credit cards and car payments -- top 50 percent, he worries that finances in a household will be uncomfortably tight. Factor in gas, health care, utilities and groceries, and there isn't much, if any, money left for fun, let alone savings.

Ultimately, it's those categories that suffer in an overburdened budget. "You may have to say no to some vacations or get the new 37-inch flat screen instead of the 50-inch," Jones said.

Others will opt to put the 50-inch on a credit card, digging themselves deeper into debt.

Eventually, we all must learn to spend no more than we make. "We'd love to have the $100,000 job, but we need to learn to live on a $40,000 job," Emmel said. And the first step in the right direction, no matter how tedious, is to track your spending. Might as well start today.

Next week: Monopoly money, Quicken, or a paper and pen. Budgeting methods exist for all types.

Do you have the budgeting blues? Tell Kara McGuire at 612-673-7293 or kara@startribune.com. Read Kara's blog: www.startribune.com/kablog