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What is the family budget? It is a pro-active, hands-on approach, focused, technical and disciplined strategy to getting a handle on the current financial situation in the home and family.
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It concerns setting realistic, SMART financial goals for the household, sticking to it, celebrating successes, learning from failures and trying again if you do not succeed or get it right the first time round .It is about shifting focus completely from a mainly spending to a savings orientation. Cash and money-management 101 for everyone!
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We have laid out what a family budget is, does and affects. A brief mention of what constitutes as good family budget and the elements that it contains as well as its appearance, format and functional role follows.
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All of us have a wish list of new things that we want. There is always things we would find and places to spend our money. Take the time to make a list of these things. Let everyone who shares cost in your home to have input into making and finalizing this list. Write down what you want most. Beside the goal, write how much it will cost. Split it into goals with ongoing costs and the cost per month, and goals with a one-time cost and list the actual total cost (including all hidden fees, taxes, shipping and or other charges that might apply. Now, next to these columns, start to prioritize these goals.
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Which goal comes first? You need to decide which goal on your list should come first.
Talk this over with the other members of your family. If you live alone, think it over yourself. Try to list your top four goals and decide what you can fit into your budget.
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A ‘good’ budget is in the eyes of the creator or beholder alike! Some suggested, but by no means comprehensive criteria follows:
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1) Budget is both process and product.
2) Collaborative, engaged, hands-on effort.
3) Characterized by communication and mutual agreement.
4) It advocates involvement and exchange.
5) It is real-time and reality-based.
6) Factual.
7) Accurate.
8. A financial check-up and check-in on the family finances, household dollars, situations, behaviors, and resources.
9) An action-plan, future-oriented.
10) Offers a peak into the past, scrutinizes and enlightens the present, while planning and promising a future.
11) Goal and results oriented.
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The Family Budget Process.
This brings us to the family budget process. We might ask questions like:
1) How to set up a family budget?
2) How should a family budget be used?
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Insights around the tools and techniques of family budgeting could also be useful:
1) Practical suggestions for setting up a budget?
2) A step-by-step summary of a family budget process
3) Hints, tips, tricks and tools for setting up a family budget
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To get us started and in order to set up a monthly budget, follow these five easy steps:
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Step one: find out your monthly take-home pay.
Step two: find out what your expenses are.
Step three: find out how much you spend on each expense.
Step four: see if your monthly expenses match monthly take-home pay.
Step five: Balance your budget. This means in your family budget you need to ensure that you are spending matches take-home pay. It might indicate that you have to cut back on spending to balance.
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It sounds too good to be true and too simplistic. However, in the end, that is all there is to this family budgeting process! Initially at least. Let us look at these steps one at a time.
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1) Finding out your monthly take-home pay. Your income is your pay, after some money is deducted. Think taxes, insurance and Social Security. Answer the following questions:
What is your monthly take-home pay? Do other people share expenses in your home?
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As mentioned before, total all of the households’ monthly take-home pay. This will include all sources of income for all contributing members of the household.
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2) Finding out what your expenses are. This brings up other pressing questions: What are your monthly expenses? Where does the money in fact go every month?
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Most people are surprised to learn that it may go for things that we do not need at all.
Writing your expenditures down provides us with the unique opportunity to visualize and find out if any money goes for things that we do not need or want.
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Here is a short list of expenses that many people have. Put a check mark next to ones you have, then write down any expenses you have, that are not on the list.
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1) Necessities like food.
2) Clothes laundry dry-cleaning.
3) Car and transportation expenses: gas, oil, parking, license, plates, car repair, train fare or bus fare.
4) Rent, mortgage payments, heat, electricity, phone, water, property taxes, house repair, appliance and repair, furniture, small items for home, cleaning supplies on the yard care.
5) Medical and dental expenses: doctor, dentist, drugs, hospital or clinic.
6) Savings: short to medium term for something soon, a future purchase, emergencies, investments.
7) Installment payments: car, furniture, appliances, charge accounts, credit card accounts, loans.
8. Pocket money, personal allowances, tobacco, beer, wine and hair care.
9) Entertainment, movies and eating out Recreation, sports and equipment, club membership, newspaper, magazines, cable TV, records and tapes, DVDs videos and other multimedia, vacation, letters and postage.
10) School bills, books, room and board at school, workshops, special training courses, lessons, music and more.
11) Donations: church or synagogue, charitable giving, charities, other and gifts.
12) Insurance: (if not deducted from your pay check): life, health, house, car and property.
13) Taxes: (if not deducted from your pay check): Federal, state and local income, social security.
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Which other ones could you list ?
Finding out how much you actually spend on each expense.
This is the hard part, where some thought and effort will have to go into the process to ensure the most accurate information is recorded. This will give a realistic and real-time estimate that is reliable and accurate.
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In this section, you need to ask yourself how much each item on your list actually costs how much each item costs you a month.
The following estimates and guidelines could prove helpful to you as you set up your family budget:
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1) Monthly bills that stay the same – car and rental payments
2) Monthly bills that change – utilities, phones and more. Find costs per month for say six months, add them up. Take this number you have calculated and divide it by six (the amount of months) to get your average cost. This is the number you will be using for your budgetary exercise.
3) Bills that come every three or six months – the number for every month will be used in your budgetary process.
4) Bills that come annually, meaning once a year – divide the amount by 12 months. The answer is your monthly budget number.
5) Bills that come more than once a month – food, gas, lunch and family fun. This is a category to watch very closely, as it is a contributor to this “bottomless pit”, we sometimes feel and see our cash disappear into.
6) Unexpected expenditures or surprise bills – what you can afford to set aside as a buffer or emergency, contingency fund – (look at the last three years or so and see what kind of unexpected expenses you and your family faced). Use an estimate that makes sense to you and divide the annual number by twelve months to get your monthly number.
7) Finding out if monthly expenses match monthly take-home pay. Compare your total expenses with your take-home pay. A couple of results and scenarios could be staring you in the face:
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Positive result: Income more than expense – you can either spend or save!
Negative result: Expense more than income – spending more than you have, you might have to cut costs and try to save some money to cover the bases!
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Whichever of these outcomes you are faced with, knowing is better than not knowing. For some this might bring little comfort and relief, but people in general, find this exercise useful to make an unknown more measurable. It makes us both accountable and wanting to act, faster and that sense of urgency and momentum is just what the family budget process needs!
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Finding ways to balance your budget.
Earlier it was stated that a good budget would mean income would be equal to expenses.
Having a small surplus is no guarantee by any means. You might need this to cover and unexpected rise in oil and gas prices or a larger grocery bill due to a party you are hosting at home.
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This almost brings the concept home of a sliding scale, flexibility and discretionary buffer categories in budgets to absorb this give-and-take roller-coaster ride that is family budgeting.
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The good news is whether you are in the red so to speak or just scraping by, managing to save nothing or maybe a little, or even a lot, this process will highlight areas where your attention is needed right away. It gives direction and purpose and assists families to formulate their spending plans, goals, re-visit their needs, dreams and goals.
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Balancing the budget is no easy task. Here are a few steps that we can suggest to make your life a little easier:
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1) Find out how much you need to cut from your expenses.
2) Decide you can make cuts in your expenses and be detailed.
3) Re-balance your income and expenses after you’ve made these cuts.
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A word to the wise: Do not make cuts in your budget that you cannot live with in real life. It is extremely important to remain realistic and keep your real-time expenses and living realities in the forefront of your mind when you make these decisions.
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If you’re getting out of a situation where you are in debt and short of cash, you have to try to curb spending any way you can. Cutting those expenses are crucial, not only because you are over budget.
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We mean that there might be other reasons, like adding a budget-line to your overall planning for your family vacation. Realistically, we cannot add and address new needs and goals before we have fulfilled our duty and responsibilities.
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Cutting a little here and there will mostly do the trick – cancel that newspaper subscription for the papers that just land in the recycle box or garbage anyway. Do you need all the specialty channels and packages on your Cable TV options? Can you live with giving some up?
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There is always the specter of rising prices and interest rates, inflation and more to cope with as well, so building preparedness for that into your budget is also a priority. Whatever we can do to cut our costs and expenditure will benefit our pocketbooks and family budgets immensely!
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Cutting back on things you need the least is a good starting point if you are at a total loss as to what and how to give something up, add a new line into your budget or plan for the future or inevitabilities. You are well on your way in the family budgeting process. You are doing it, every step of the way. Consolidate and re-visit your budget often – it is a dynamic process and ‘living’ document or tools so to speak to help you keep your fingers on the pulse of your financial situation.
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Another useful strategy is to set up a bill-paying plan and process that will protect your interest. When, how and how much you get paid will all influence your course of action. Creative and innovative allocation of your paycheck is the key.
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If you get paid once a month, the amounts in your budget will have to be paid monthly as is.
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If you get paid twice a month, divide each budget item by two.
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If paid bi-weekly (as is mostly the practice these days), still divide the monthly amount by two – it will not be the exact amount to plan for, but a rough and close estimate. In the end better than nothing!
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If you are paid weekly, divide each budget item into 4. Cash flow management will form a big part of your fiscal strategy, once you have put your budget pen to paper and mapped out the needs and requirements. Utilize your cash, checking and savings account (if applicable) to pay for expenses. Do not pay your bills with your credit card!
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Keep track of all your discretionary spending. A financial diary for a week is always a good idea to scribble down in every time you withdraw money, pay for something or open
your purse without thinking.
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This will provide you with insights you did not have before on where the money actually goes. It will also carry within it, clues to adjust budget lines if actual cost is higher on certain items. Spending patterns and behaviors will emerge that might surprise or shock you!
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Having some wriggle-room and discretionary spending is always motivation. The occasional treat and indulgence, special night out or other family activity is that more enjoyable, if you know you have worked hard to earn it and deserve a pat on the back for all your fiscal responsibility and discipline!
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Always keep one eye on the future folks… budgets might need to change again and again for a variety of reasons. You can never feel you have “arrived” completely and that your budget is set in stone. Family and life often throws us a curve ball or two, banks, service providers, government and fate sometimes do too!
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Changing budgets should not be a source of frustration for you; it actually shows you that your family budgeting process is actually working. It is a real-time pulse and mechanism to capture these changes, which will leave you prepared and informed, ready to act and respond appropriately. This impetus for change can come from different sources.
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Here are some examples:
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Change of income, goals, rising prices, goals reached, family growing, moving and or relocating to a new place, family getting smaller, new spending habits, change in lifestyle or unplanned expenses.
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If you can stick with it and see it through a family budget can help you meet your goals, get and stay out of debt, pay your bills on time, every time, keep track of your spending, cut costs and stretch your dollar to the max!
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Stay tuned for more informative Budget Tips…
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