Managing the finances of a household is an important life skill that’s very tricky to learn, especially when you’re struggling with debt. The decisions you make about spending money will affect whether you can accomplish your goals as a family or will be dealing with financial stress. Even if you have the best of intentions, it’s very easy to overspend when you don’t have a budget for guidance. The first step is understanding your income, your spending habits, and what it will really take to reach your financial goals. Get started on your family budget with these sensible tips.
Set goals as a family
Having concrete goals is the best motivator for taking financial planning seriously. It’s important to include the whole family in the budget planning process– if only to explain that you need to handle your spending carefully so that you can reach your important goals. Everyone needs to be on board because there may be compromises, such as having to order less take-out. If your goal is paying off debt, talk about how accomplishing this would mean more peace of mind and allow you to reach other goals, like taking a vacation.
Understand your income and spending habits
To create your budget you’ll need to develop an accurate picture of your financial life, including everything that’s coming in and everything that’s going out. Gather materials like pay stubs, bank or credit card statements, bills, and receipts. Determining your monthly income is the easy part, but do you really know where it’s all going? Make a list of your “fixed” expenses, payments like the rent that are always the same, and your “variable” expenses, which can go up and down. It’s okay to just estimate your variable expenses based on your general habits, but the idea is that from now on you will be tracking your expenses and sticking to your budget. Be thorough and realistic in your analysis of where the money goes, including categories like transportation, entertainment, clothing, and childcare.
Identify where you can adjust for the sake of your goals
Now that you have an understanding of how much you earn and roughly where it’s going, how is your net income looking? This “net income”, your income minus all expenses, needs to become the focus as you design your budget. You won’t have any opportunity to tackle important financial goals, like paying off debt, if this number is too small or even negative. Most families will begin to identify where they can cut back by looking at “discretionary” spending, like eating out or going to the movies. Some fixed expenses can also be adjusted, such as getting a cheaper cable plan. One trick is to set aside a certain amount of “fun money”, as actual cash in an envelope that is only replenished once every month. It’s hard to change spending habits, but you can do it by focusing on your goals. Focusing on “needs” vs “wants” can help clarify where your money should go.
Create and manage your budget
Now it’s time to create your budget, but it’s actually not something you’ll do just once. In order to maintain a healthy net income, you have to regularly track your expenses and monitor your progress actually sticking to the budget. Make any necessary adjustments so that your budget remains realistic and useful. If you find yourself going over in one area, you have to either try to rein that in or balance the budget by cutting somewhere else. Your budget also needs to have a buffer, for those unexpected expenses that can pop up. You can either slightly over-estimate some of your variable expenses or set aside a certain amount for those surprise costs. Depending on what’s easiest for you, manage your budget by using free online tools like Mint.com, starting a simple Excel spreadsheet, or just with a pen and paper.
Understanding how to use your money to move forward in life is the key to building a solid financial future. Making a budget, and sticking to it, will allow your family to accomplish your goals and create the life you really want.