“I think I’m entitled to splurge if my spending is within my means,” the young woman was saying to me. We were both guests at a mutual friend’s home where an anniversary party was underway. Somehow we gravitated to one another and got along famously right away, striking up a lively conversation after floating into a vacant sun room with a couple of drinks in tow. Sarah was an avid talker, and I was an attentive listener. I discovered that for her, four toilsome years of college were coming to a close in just a couple of months’ time. Money had always been scarce during her studies, she told me, and she felt she had made many sacrifices. But now life was looking up. All her schooling in computer imaging and digital gaming was about to pay off. Thanks to being at the top of her college class, she had been scouted early in the year and offered a plum position by a top digital animation company. She said a big carrot was dangled in front of her, and she had accepted a full-time job scheduled to start almost immediately after graduation come late spring. For the moment, though - some days before spring’s official arrival actually - Sarah was telling me she intended to buy an expensive new automobile to celebrate her good fortune. With something like triumph in her voice, she told me she was about to say goodbye forever to bumming lifts from others and slogging about on buses and subway trains. She planned to do so in real style. “I’ve always wanted to buy a Lexus,” she said to me in the sun room. “When I was in high school, my best friend’s mom got one, a sleek gold thing with super comfortable leather seats. In those days, the mom drove my friend and I to all our softball league games, sometimes involving long trips out of town. I loved travelling in that car, I even loved sleeping in it. “It always had that new car smell. On the highway, it seemed to float along on a bed of clouds. I felt rich riding in it as opposed to feeling poor riding in my dad’s car - a shaky old Subaru station wagon. I remember saying to myself back then that one day when I could afford it, I’d buy myself a Lexus. Now, that day has come.” I took a moment to consider Sarah’s words. I got a bit of a chuckle out of her reference to her high-school friend’s mother as “the mom,” as though the woman were some sort of generic accessory to the car in question. More to the point, though, I was curious about Sarah’s finances. I wanted to know how the she could afford to splurge on a luxury car so early in the game of life. “If you don’t mind my asking, Sarah, how much do you intend to pay for the vehicle?” “Well, I’ve looked into what’s available, and I’ve decided I want a new Lexus mid-level sedan with a few options. I mean, I absolutely have to get a sun roof! I think I can get a 60-month lease at about $750 a month. I figure leasing is best. I don’t want to have to worry about maintenance and stuff.” As the figures rolled off her tongue, I was surprised and a bit unsettled. I wondered, just how much does this young woman’s new employer intend to pay her right out of the college gate? I wanted to ask her outright about her salary, but I didn’t want to be too forward. I decided to try to ease into the subject by dancing around a little deductive reasoning. I remembered that as a general rule of thumb for anyone’s budget, no more than 10 per cent of gross (or before tax) income should be devoted to car payments. I deduced that If Sarah was following this rule at the full 10 per cent, her annual income would have to amount to at least $90,000. I figured that was just the number I needed to move the conversation along. “You know Sarah, if you look at standards surrounding car finance, a person would need an annual salary approaching six figures to properly handle a monthly car payment of $750.” “Oh, I won’t be making that kind of money!” Sarah flinched. She looked at me earnestly, then lowered her voice. “Just between you and me, my salary is set at $65,000, which I know sounds pretty outrageous for someone fresh out of college – it’s about double the normal entry-level pay in my field. The thing is, my new employer really likes an idea I developed in school for a digital game. They want to explore taking it to market. If it does make it to market and succeeds, my income could really soar.” “I see,” I said. “But there’s no guarantee the idea will fly in the market?” “Yeah, there’s no guarantee. A lot of thinking and work still needs to be done.” “Right,” I said. “I don’t mean to sound preachy, but maybe you should consider the purchase of a new car only within the framework of the actual income that’s coming your way.” “I already have,” Sarah said in a matter-of-fact way. “I’ve calculated that my annual income after taxes will be about $50,000. I think that’s enough to cover my car payments and live comfortably.” I took a moment to make a few mental calculations. Then I spoke frankly. “Sarah, by my reckoning in terms of this car you want to buy, you will be devoting something like 18 per cent of your take home pay to car payments alone. Let me ask you, have you created a budget?” Sarah’s eyes went blank. “What do you mean?” “I mean have you used a budget calculator to create a monthly budget plan that pits your pending income against all the things you intend to spend money on over a year once you start working. I’m talking about spending for your car, rent, bills, everyday expenses, little luxuries - everything. Your budget planning should be in writing, and followed religiously. Use the Credit Canada budget calculator to get you started. And not only that, it should be tested regularly against financial goals and dreams you set for yourself.” Sarah looked puzzled. She also looked somewhat embarrassed, perhaps because I had earlier told her a little about myself as CEO of a not-for-profit credit counselling agency that helps people with money problems. Shaking her head from side to side, Sarah said, “No, I’ve never seen the need to write down a budget. I’ve got it all in my head. I’ve always known what money comes in and what goes out. Or pretty much so. It’s not complicated.” “Maybe not yet,” I said in a vaguely ominous way. Then more calculations started to flit through my head, and an idea came to me. “If you’re game, I can give you a hypothetical summary of what your monthly spending might be over your first year of work. What do you say?” “Sure.” “Good. First, let me ask you, do you have any savings or investments?” “No.” “What about debts?” “Well, I’ve been using one of those pay-as-you-go credit cards that pulls money from cash in the bank, so I never owe anything on the card.” “That’s good,” I said. “But I owe $25,000 on my student loan, which I know I’m going to have to start paying back in the not too distant future.” “That’s not so good,” I said. “Do you know what the interest on the loan is? “I’m not sure. I believe it’s somewhere between four and five per cent. I think I have ten years to pay the loan back.” “Okay, that’s fine. I’m going to fire off a list of make-believe, but generally realistic, monthly expenses that could apply to you. Stop me if you think any of the figures I’m about to mention sound way off base in terms of being too high or too low. But try to give me some leeway.” Sarah nodded as I pulled out my Blackberry and used its calculator to keep a running tab of the monthly budget figures I had in mind. I got down to business. “Let’s start with your $750 car payment. Add to that another $600 for gas, insurance, and parking. Add a rent payment of $800. Furniture and appliance payments at $250. A grocery bill at $300. Cell and Internet bills at $100. Utility and cable bills at $100. Dry cleaning at $50. Emergency savings at $200. Minimal life, property, and specialized health insurance at $200. ” I took a couple of breaths and kept going. “ … New clothes and gear at $200. Coffee and lunch money at $200. Entertainment – including dinners out, movies, travel, et cetera - at $200. Let’s also add $200 for wiggle room. And last but far from least let’s say you’ll spend $300 a month to pay back your student loan. Now, let’s total up the spending and compare it to a net income of $50,000.” Sarah had not blinked upon hearing the numbers, though she did say at the end of my litany that she suspected a few of the figures might be a bit low. I gave her the totals. “Okay then, what you might call modest monthly spending amounts to $4,450,” I said. Then I calculated another figure. “That puts your total annual spending at $53,400, meaning your annual spending has exceeded your annual net income by $3,400. ” “Oh dear,” Sarah said. “I see what you mean.” “Yes, Sarah,” I said. “Perhaps later, if and when your finances allow, you can buy a car like the one the mom once drove. For the time being, though, maybe you should consider buying something like a Volkswagen Jetta, a nice car, and I believe it comes at less than half the price of your Lexus. I think it might even include a sun roof – or you can always negotiate.” Sarah laughed. And so did I. And then we both made our way back into the party.