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The Honolulu Advertiser
Posted on: Thursday, September 14, 2006

Draw a road map to plan your personal financial trips

By Michelle Singletary

Anytime I drive to a place for the first time, I get directions. Sometimes I do this even if I've been there before. I'm always looking for an easier, quicker way to get from here to there.

The same approach goes for your budget. If you want to know where you're going financially, you need to have a road map. And just like any trip, there can be several ways to get to your destination. That's why you should update that map periodically.

In a recent column, I provided a set of budgeting principles to help folks get to where they want to be financially. Many readers had questions about the budget percentage guidelines, provided by Money Management International (MMI), the operator of a network of nonprofit credit counseling agencies.

One reader asked: "Do you have a guideline for what percentage of income a family should spend on its annual vacation?"

Tom Rehwald from Illinois queried: "Do you have percentages for a retired (retiring) couple who own their home free and clear?"

F. Christian Thompson of Virginia wanted to know why MMI didn't include how much people should spend on charitable giving.

Others asked: Would you add line items for house repair, tuition, childcare and teenage children? Where does a car loan fit in this equation? As a transportation cost or a personal debt?

These are all great questions.

Got kids? Then you need to add a separate category for childcare. That expenditure might eat up 10 percent to 20 percent of your budget. Have a long commute? Then your transportation costs may be more than the 8 percent recommended by MMI. Oh, and a car loan should be included under transportation.

Lynn Hartwig of Massachusetts says her family's annual travel budget is 8 percent to 10 percent of its annual income.

"Our trips perhaps two four-day-long weekends (with airfare), one or two midwinter hotel getaways at local hotels and one 10-day with hotel stay make hanging to the budget the rest of the year manageable," Hartwig wrote.

As long as the rest of her budget is balanced, I don't see a problem with vacation expenses taking up that large of a percentage of her family income.

As for retirement, I couldn't find any recommended percentages that differ greatly for retirees. Clearly some expenses will change rising or falling depending on your retirement lifestyle. My grandmother lived on about 50 percent of her pre-retirement income. Other retirees don't see a cut at all in their living expenses.

According to MMI and most other financial experts, you're more likely to find financial comfort if you keep your housing expense in a range of 25 percent to 35 percent. If you are retired and don't have that expense, then you'll probably end up putting that money toward rising healthcare. My goal is to pay off my mortgage before retiring so that I can free up a lot of money for other expenses.

Why the exclusion of giving?

MMI works with folks who are barely hanging on money-wise. Understandably, the budget template the organization uses doesn't necessarily include a line item for charitable giving. But I should have emphasized giving.

"Except for the poor, everyone should give something back and not just taxes," Thompson, the Virginia reader, said. "So there should always be a category for giving."

I agree.

My family budget starts with charitable giving and tithing, and it doesn't get cut no matter how tight money gets. Trust me. Giving 10 percent of your gross income puts you in the financial mood to make what's left stretch to what else is important in your life.

Many readers questioned the percentage range for debt. MMI puts that at 10 percent to 20 percent.

"The personal debt slush fund is too large," Hartwig argued. "I think much is hidden in the personal debt category the vacations, gifts and holiday spending must be buried there."

She's absolutely right. Debt makes you a slave to the lender. Yet the average family is carrying about $9,300 in credit card debt, according to CardWeb .com, which provides payment card statistics and trends.

You really shouldn't have a line item for credit card debt. Still many people do. So since they do, they should account for it in their budgets.