Remember the days when you hardly made any money, but you got by fine and were having a great time doing it? Ahhh, the good old days. We could always find a way to scrape together enough change to go to Oldies Night on Sundays at the local watering hole because there was no cover charge and beers were only 25 cents until 10PM.
Now, you’re much older, and likely making a lot more money than you did back then, but most of us still face the same challenges. Sure, you may not find yourself eating ramen 12 times a week, and seeking out 25 cent beers (although that would be pretty cool), but now if you want to go out, you’re feeding four people. You have to stay in an actual hotel instead of a youth hostel for vacations. And if you simply want to go to dinner and a movie with your wife, you have the added expense of a babysitter. So you still have to find a way to scrape together enough money to do something fun.
The foundation of any financially sound family is a budget that works. Far from a “nice to have,” it’s critical for financial stability. Think of it as doing for your financial life what a training regimen does for an athlete.
Many dad’s out there think that Budget is a four-letter-word. Many financial planners refuse to use the term and substitute it with “Savings and Spending plans”. The key to Budgeting is to create a budget that works. Not the kind of budget where you are trying to find every area to squeeze a few pennies out of or a budget that doesn’t leave anything to save, but a real workable budget that allows your family to enjoy itself and still sock away money for the future.
Many families barely scrape by. Now matter how much money they make, at the end of the month the income is gone; or worse, they have accumulated even more consumer debt. When their incomes grow, their expenses somehow grow as well. It seems that no matter what they do, they are always tapped out by the time the end of the month rolls around and are left waiting for that next paycheck.
Where does our negative vibe around budgeting come from? Many people think that budgeting means cutting back, being restrictive around spending, lack of freedom to do what you want when you want, penny pinching, and having to tell your significant other when they are spending too much (Ouch!). It’s not too surprising why many families do not even have a budget. The results of a 2005 survey conducted by Ipsos Public Affairs for FindLaw.com found that 61% of Americans either don’t have a household budget or have difficulty sticking to the one they have.
Budgeting does not have to be a bad thing. You simply have to change the way you look at it; make a paradigm shift. Try not to look at budgeting as a way to cut spending, look at it as a way to know how much is coming and in where the money is going. It is also the means of reaching your financial dreams and goals, big and small. Think about it, if you were the CFO of a company, it would be your responsibility to know what is coming in and where the money is going. The same applies for your family, but on a much smaller scale and it does not take the same level of education or skill to be successful. Knowing where your money is going is half the battle.
In this light, budgeting is more of a tool. It’s a map. By budgeting, you are creating a map of your spending. And once you have a good map, then you can look at all of the different paths you can take to get where you want to go.
5 TIPS FOR GOOD BUDGETING
GET THE RIGHT MINDSET – You have to get over the thoughts that budgeting is a bad thing. The true bad thing is not budgeting or not knowing where your hard earned dollars are going.
START KEEPING TRACK – First identify a list of your expenses. Organize them into fixed and variable expenses. If you wish, you can add sub-categories from there. Next, assemble a list of your income generators. As the Income and expenses start coming in over the month, be sure to categorize each. Once the month is over, add it all up and see where you are at. Focus on any gaps, such as that $200.00 that’s unaccounted for.
GET SOFTWARE – You really don’t need anything fancy to budget. Your organizational system could be as simple as a set of envelopes, but using software makes budgeting a bit simpler. There is some initial set up time involved, but it’s minimal. Systems that are widely used are Microsoft Money and Quicken. These applications are very intuitive, and will even pull transactions from your financial institutions. These applications make tracking income and expense a breeze. There are several on-line budgeting tools as well, such as: CNN Money, Crown Financial, and Kiplinger.
STICK TO IT – Some months are not going to go as well as others. You may even get a string of bad months. Do not get discouraged and throw the towel in. Even if you have several months in a row where your budget is out of balance, or you neglect to keep track of it all, you can still learn something from the experience. One thing is that you need to plan for un-planned expenses such as car repairs, home repairs, medical bills, etc…
MAKE IT FUN – The exercise of creating and managing a budget can be as boring or as fun as you choose to make it. Choose wisely!! Get your entire family involved (a bonus key to success!). After assessing each month, you will find yourself making goals for the following month. If you meet those goals as a family, treat yourself!! Take the gang out for an ice cream cone. You’ll be creating some lasting memories as well as setting a great example.
PITFALLS TO AVOID
GIVING UP BECAUSE YOUR BUDGET DOESN’T BALANCE – At first, your budget may not balance. Remember, that’s likely why you started down this path in the first place. Don’t be discouraged! Find the places where you can cut back without dramatically altering your lifestyle. There are usually areas in a budget where many people typically overspend. You’ll find the variable expenses category more flexible to work with, but don’t overlook a thorough examination of your fixed expenses. Could you refinance your mortgage for a lower monthly payment or adjust your auto insurance or cut out the premium channels you are paying for but rarely watch? As for variable expenses, perhaps you’d feel comfortable eating out one night less per month. Or maybe you could rent movies more often and cut back your visits to the theatre.
THE BLACK HOLE – Some families have something of a black hole where money seems to vanish each month:
– Too much cash. If you carry less, you may spend less. People tend to spend whatever cash they have and they can’t remember what they spent it on. Usually it’s been spent on too many lattes or fast food items they wouldn’t buy if they didn’t have cash.
– Too much food. Many families spend excessively on groceries and eating out. Are you? If you tend to throw out a lot of food because you end up ordering a pizza instead of cooking, spend less at the supermarket on meals that never get prepared.
– Too many gifts. Or perhaps the gifts are too expensive. You may overspend for weddings, Christmas, or someone’s birthday. Set limits and be creative; many people enjoy a very personal gift as much as an expensive gift.
– Too much mall or shopping time. When there’s nothing else to do, many of us head out shopping. You’d be better off finding other ways to enjoy yourself that don’t involve spending money. Heck, you might just get in better physical shape as well.
UNREALISTIC EXPECTATIONS – What do you expect to gain from creating and following a budget? Do you think that setting up a budget will reveal large caches of hidden cash after a month or two of tracking expenses? The reality is that budgeting is a long-term process. By sticking with it through good and bad, you will come out ahead. Don’t expect instant magical transformations. What you WILL see if you stick with it is steady, measurable progress towards the goals that really matter.
NEGATIVE ATTITUDE – A positive attitude about budgeting is essential to success. If you think of budgeting in negative terms than you’re sure to fail. A positive attitude means you think of a budget as a means to an end–a way to achieve your dreams and goals–and that postponing the instant gratification of spending all the money you earn is worth the rewards you’ll earn in the end.
NO MOTIVATION -There are several things that can be motivators, but it’s better to have positive ones than negative ones. Sure, a nagging spouse, a debt repayment plan, an agreement made in bankruptcy court are all motivators, but they’re external and are reactive, not proactive. The best motivations are internally generated.
There really are many important reasons to budget, but here are some of the best:
– A budget will tell you if you’re living within your means. The use and abuse of credit cards has made this much less obvious. Many people don’t realize they’re living far beyond their means until it’s too late.
– A budget is a guide that tells you whether you’re going in the direction you want to financially. You may have goals and dreams but if you don’t set up guidelines for reaching them you may end up going so far in the wrong direction you can never make it back. Can you imagine the government or a major corporation operating without a budget? No! And neither should you.
– A budget can help you get out of debt , and help keep you out of debt.
– A budget lets you control your money instead of your money controlling you.
– Following a realistic budget frees up spare cash so you can use your money on the things that really matter to you.
– A budget can help you meet your savings goals.
– A budget can help your entire family focus on common goals.
– A budget helps you prepare for emergencies or large or unanticipated expenses.
– A budget can improve your marriage. A good budget is not just a spending plan; it’s a communication tool. Done right, a budget can you and your spouse closer together as you work towards common goals.
– A budget reveals areas where you’re spending too much money so you can refocus on your most important goals.
– A budget helps you sleep better at night because you don’t lie awake worrying about how you’re going to make ends meet.
NEXT TIME…MANAGING CREDIT AND DEBT Credit and debt seem to be the American way. While many families use these financial tools in an effort to get ahead, or simply keep up with the Jones’, mismanagement can lead to financial disaster. The next installment of the Family Finance series will take a look at credit and debt. We will cover some of the different types of credit and debt, good uses of credit and debt, strategies to keep you out, or get you out, of trouble, and some key terminology associated with each.
ABOUT THE AUTHOR: CHRISTIAN RAND is a Strategic Alliance Analyst for a healthcare software consulting firm In the Pacific Northwest. While finance and investing have been a hobby for several years, writing for an online publication is a new venture. (Now he can check off one more item on his “…things to accomplish list”.) Christian grew up in the Detroit metro area and now lives in Seattle with his wife of 15 years, three year old son and seven year old daughter. He earned his B.A. in Business Administration and Commercial Recreation from Central Michigan University in 1991 and is a Microsoft Certified Professional. When not working or researching the latest financial news, Christian is on camping trips and traveling with the family, working on his golf game, and playing with his kids. You can get in touch with Christian at: firstname.lastname@example.org or by posting in the Family Finance forum of TheFatherLife.com.
ABOUT THE FAMILY FINANCES SERIES – Money can be one of the most challenging areas of life. This is true no matter what your situation, but especially if you have a family. We at The Father Life believe that healthy financial habits are absolutely critical to a healthy family, and want to encourage responsible use of personal resources. ‘Family Finances’ is a series of articles on topics that are important to family life and a healthy financial future. Saving for and buying a family home, planning for your kid’s college, managing credit, planning for retirement, taxes, investing strategies, and getting out of debt are a few of the topics that will be covered. In researching topics for this series of articles, we’ll try to distill the most current information on the subjects in an unbiased manner so that you can make the best choices for your specific situation. We’ll also separate the myth from the facts on each subject. We hope this series is helpful, and, as always, your feedback is appreciated! We’d like to especially thank Christian Rand for putting together this series for us.
Images: Nathaniel Dodson