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Managing your finances is a difficult task and millions of Americans struggle on a daily basis to live within their means. It's not always easy to meet our financial obligations each month. And that's where creating a family budget can help out. Whether it is grocery shopping or paying the monthly electric bill, we're faced with family budget decisions all the time. It always seems like there is one more bill to pay or a big decision needs to be made on an expensive family vacation. We make decisions all the time that affect our ability to stay out of debt.
The key to successful financial management is effective budgeting. Unfortunately, creating a budget and sticking to it can be extremely difficult—but it is doable. A proper budget planning is critical to reduce your stress level as well as conflict in the family. Believe it or not, money or financial issues have become one of the top reasons for people to seek divorce.
So if you're looking to create a family budget, then you've come to the right place. Not only do we already have an entire series dedicated to household budget basics, but we are going to supplement that information with three new tools.
Creating a Family Budget:
One of the most important factors in successful family budget is to figure out where does your money go? Most people would say that they know their expenses but very few can actually track down their monthly spending. Others just wonder where their hard-earned money goes each month. Believe it or not, pinpointing your expenses is easier said than done but you can find out by simply organizing your finances through a budget.
Why do we need a budget? A budget is a financial roadmap created on a monthly basis. Creating and managing a budget is the cornerstone of good financial health. It's a step-by-step planning process that puts you in control and allows you to better manage your finances. You'll know exactly where your money goes each month and contrary to popular belief, budgeting doesn't’t mean depriving yourself. A budget is simply an organizational tool that helps you monitor your spending habits and control where you spend your money.
There's no way to create a budget without first looking at where your money goes each month. This can be a daunting task, so it's a good idea to break it up into manageable pieces. First, examine your expenses over the past two or three months. The best way to do this is to review your monthly bills and receipts. For example, you can create a log to list some of the common expense categories as listed below.
As you can see, this is a rather long list but it is still not exhaustive by any means. Remember, some of the expenses are not monthly so be sure to convert it to a monthly expense. For example, if you may pay insurance premiums quarterly, divide your quarterly bill by three to get the monthly amount. Once you have every single expense written down, let’s get ready for a dry run.
Use a notebook and write down every penny you spend over the next 30 days. If you buy a cup of coffee on your way to work, write it down. If you buy a candy bar for a late afternoon snack, write it down. This can be somewhat time consuming but would serve a very important purpose at the end of your 30 day period. Once your 30 days period is up, compare your spending log against your expense categories and see if you find substantial spending on items that are not even listed on your spending categories. This review is an eye opener for some people but has a simple explanation in black and white about where your money goes. You may not even realize how much money you're spending. Once you have snapshot of your spending habits, you’ll probably have ideas on how to reduce your spending just from looking at this information.
Next step is to have a clear picture about your family income because budgets not only include monthly expense information, they also include your monthly income. For the purposes of a budget, you should only look at your take-home pay (net pay) instead of your actual salary (gross pay). If you get paid biweekly(every other week), multiply your take home pay by 26 and divide by 12 to get a monthly amount. If you get paid every week, multiply your take home pay by 52 and divide by 12 to get a monthly amount. Since most Americans get paid biweekly, we suggest that you only consider two paychecks per months when working on your budget. Main reason for doing this is avoid advance spending. With biweekly pay, you get 26 paychecks a year, so you get two paychecks every month and two of the months will have an additional paycheck(three paychecks each for these two months). What is nice about this arrangement is that you’re left with two additional paychecks each year that you didn't’t factor in your budget and thus this is your extra annual saving that you can use for retirement, vacation, big ticket items, etc. It will also relieve stress on your monthly budget because if you have a big expense like car repair or home repair, you probably won’t have money allocated to it and may have to take unwanted debt. So if possible, try to manage your monthly budget with two paychecks only.
You now have the basic information necessary to create your budget. After you've gathered your information, the next step is to compare your income and your expenses. Add up your monthly income and add up your monthly expenses. If your income is greater than your expenses, you have a surplus that can be used to pay down existing debt or used for savings. If your income is less than your expenses, you have a deficit and should either cut your spending or figure out a way to generate extra income with a second job.
After comparing your income and expense information, the next step in the budget process is to set financial goals. It's a good idea to set short-term goals, which you can accomplish within one year, and long-term goals, which can take five years or more. Short term goals are easy to measure because you can see the progress and stay involved with the process. However you decide to set your financial goals, make sure your goals are realistic, easy to measure, and achievable. |
