Running out of money before the month ends? Budgeting is your family’s key to financial freedom.
Whether you have a lot of money in your bank account or just a little, you need to be in control of your finances. A key principle to remember: The less money you have, the more effectively you need to manage it.
Budgeting may sound like a financial straight-jacket, but nothing could be farther from the truth. The big benefit of budgeting is that it puts you in control of your finances. And with today’s easy-to-use apps and free online advice and tools, creating and maintaining a family budget is not the burdensome chore you might think it is.
It’s a fact that that building and sustaining a family budget takes effort and time. However, the impressive benefits you gain from a practical, well-crafted budget far outweigh any kind of inconvenience. As online financial advisor Jeff Rose has said, a family budget “brings order to chaos, sanity to spending, and freedom to your finances.”
Creating your family budget. These are the seven basic steps you can follow to create a workable family budget:
Discover how much you’re currently spending.
To figure out how to get where you want to go, you first need to find out where you are. So for one month, write down everything you and your family spend. Yes, that’s right, document everything you spend money on, and how much you spend (rounded to the closest dollar). Example: Mortgage payment = $1,200; Auto-loan payment = $375; Grocery store = $82; Gasoline = $38; Hulu = $6; Candy bar= $2. Sure, there’s some work involved—but it’s only for a month. At the end of the month, add up all of the items in each category, and you’ll have a “snapshot” of an average month of your family’s spending. Tip: Record your spending information in the “Notes” app of your phone. Or to go old-school, pick up a cheap pocket notepad at a dollar store for every member of your family who spends money.
Calculate your per-month costs of longer-term expenses down the road.
After your month is over, think ahead and write down any other expenses you believe are coming within the next year, such as homeowner’s association fees, back-to-school costs, memberships, and car insurance. If it’s an annual (once-a-year) expense, divide that amount by 12 to determine your cost per month. Example: If your annual car insurance bill is $1,400, write down a monthly expense of $117.
Total up and compare expenses and income.
Add up the actual and future monthly expenses you calculated by category; then compare the total expenses to your monthly income. Remember to include in all sources of income, such as paychecks, assistance programs, child support, and every other earnings source. Also, be sure to factor in all monthly debt-related costs, such as credit-card payments and school loans, as well as any finance-company or consumer loans. Tip: Use the helpful, free budget worksheet that you can get online from the FTC (U.S. Federal Trade Commission).
Adjust the amounts and establish spending limits.
This step is where the rubber meets the road: You decide what expenses to cut—or reduce—to balance your budget. You also need to set spending limits in each category to ensure you don’t exceed your monthly income. And yes, it takes some self-control (especially if money is tight). But the benefits of the financial control you gain far outweigh any difficulty. Example: The average office worker spends about $10 on take-out lunch (like a sandwich, chips, and drink). But if you prepare those items at home, that meal will cost $4 or less—which saves you around $6 per day, or about $130 each month.
Set up a fund just for emergencies.
Let’s just admit it: Emergencies happen. Family cars need unforeseen repairs, air conditioners fail, and plumbing leaks. But if you don’t have any emergency money saved up, unexpected expenses can side-track anyone’s budget plans. So maybe you can’t predict the future. But you can plan for the future by setting up an emergency fund as part of your monthly budget. Experts agree that setting $1,000 aside can help the average American family withstand most financial hiccups. Tip: Use the funds you save by brown-bagging your lunch to build your emergency fund. So if you were to set aside $130 every month, you’d be able to build up an emergency fund of $1,000 in under eight months.
Exercise discipline, but stay flexible.
To live successfully on a budget—especially when you’re just starting out—you will likely need to say “no” to some guilty pleasures, such as frequent eating out and unchecked impulse buying. In fact, self-discipline is the single most important factor in your budget’s success. But your budget also needs to include a bit of “fun money”—a few dollars every week that each family member is allowed to spend on anything they want. Permitting everyone a small treat on a regular basis goes a long way toward helping you stay on your budget plan.
Use free online resources to save time.
In the old days, budgeting involved reams of paper, lots of writing down numbers, and using calculators to add up totals—but no more. There are many free, automated budget tools that can save you time and effort. For an overview of what’s available, refer to the article titled Top 9 Best (and Free) Online Budgeting Tools.
How to learn more. If you and your family need more money in your month, budgeting can give you the control you need to make your finances stretch. And with so many information resources currently available, the job of creating—and living on—a budget is more convenient and hassle-free than ever before. For more budgeting tips and tricks, check out nerdwallet.com. In addition to providing a well-thought-out plan for building your family budget, their website provides a good selection of useful online tools. You may also want to review this practical article by Jeff Rose, which presents the basic principles of developing and living on a family budget in the real world.