Due to my extremely limited income, and thus, extremely tight monthly budget (of $725 cash, plus food stamps, per month, for me and three children – two of which are twin babies) and the fact that I’m still surviving somehow, and even able to plan ahead and accommodate things like holidays, birthdays, back-to-school expenses, and the like, I’ve had several friends and family members ask me how my budget works.
The answer is very precisely.
But in all seriousness, it got me thinking about how I never really ran a detailed budget before (we had a loose “general budget” when things were better) and then I thought about all the people who think budgeting is only for the poor, or who don’t know how to make or follow a budget at all.
Budgeting is an essential tool for maintaining healthy finances, and should be an essential tool for every family’s money management.
So because of this, I thought I’d share the basics of putting together a functioning budget, and a few tips on making it work well for your family. Most of this may seem pretty basic, but even if you already have a budget and think you manage it well, reviewing it again never hurts, and reading up on how others manage with less can often put things into perspective.
1) Make a list of your family’s needs. These should include both the immediate needs and your short-term and long-term financial goals.
Immediate financial needs are the obvious things that you have to have, and can’t do without. They are things like housing, utilities, food, transportation, toilet paper, clothing, etc. There are obviously many more specific things, and you should list them out, in detail, to give yourself an idea of all your necessities. Most people think they don’t have that many immediate needs, but when you start to write it all down, you can realize quickly how many more items (like shampoo, and laundry soap, etc) you might not have thought of at first.
Short-term financial goals should include the things you want and/or need in the near future, usually within the next year or two. A good example of a short term goal is to create an emergency savings fund, to pay off the balance on your credit cards, to save up for a special purchase, to take a vacation, or do some home repairs. Everyone’s situation is different, so write whatever is applicable for your family.
Long-term financial goals should include the things you want and/or need (as the name would imply) for the more distant future, and are things you should try to start working towards and saving for as soon as possible, because it will take longer to reach these savings goals. A long-term goal could be coming up with the down-payment for a house, saving money in a college fund for your kids, or planning for retirement.
Again, everyone’s situation is different and this list will differ from family to family, but try to be realistic and limit your list to things you feel are truly attainable and that you really want.
2) Assess the general state of your family’s finances by comparing total assets to total debt.
Your total assets are the value of everything you own, including cash, savings, investments, the value of your home and any real property, including vehicles, as well as your belongings such as furniture and appliances.
Your total debt is the amount of all money you owe, including unpaid and past due bills, outstanding medical expenses, any and all loans (including student loans), credit card balances, your mortgage balance, and other debts you might have.
Once you have your total asset and debt figures for your family, compare them to determine which is higher. If your debt is higher than your assets you should try to start steadily paying your debt down with a realistic payment schedule.
3) Determine your family’s total monthly income and expenses.
Although this step seems like the most obvious in creating a budget, it’s often the one that is not given enough attention.
Your total income should include all regular sources of money such as salaries and wages, as well as any income received from any and all other sources such as SSI, child support or alimony, food stamps, and interest and dividends from bank accounts or investments if you have these. Only count the amount of money that you receive after taxes and deductions for the purposes of creating your budget.
When determining your total monthly expenses, don’t forget irregular expenses that you only pay for every few months, or once or twice a year (like car registration) and divide their cost across the amount of time they cover to arrive at a monthly figure.
Divide all your expenses into two categories: fixed (those that cost the same amount every month) and variable (those that may be different from month to month). Fixed expenses usually include things like rent, insurance, car payments, loan payments, childcare, and certain telephone and internet plans, or cable bills, if the amount is the same every month. Variable expenses may be similar from month to month, or vary widely based on usage, and can include things like utilities, food, transportation costs (like gas), non flat-rate phone plans, personal hygiene items, medical and/or dental costs, and money spent on entertainment or going out.
It might be a good idea to keep a spending diary for a few months, review old bank statements or checkbooks, and even go over receipts to get an accurate estimate of how much you really spend each month. Many people grossly underestimate how much they really spend on things like groceries, or how much they use on entertainment purchases each month. Keeping track for a while to get a real picture of where your money goes each month is one of the most important parts in creating a working budget. If you don’t know how much you really need, then you can’t allot yourself the right amount of funds within your budget, and then it won’t work.
Once you have your real figures, as best (and hopefully, as accurately) you can determine, and compare them, then you can start creating your actual budget. The lower the expenses are in comparison to your income than the sooner you will be able to work towards and achieve your short-term and long-term goals that you outlined before.
If your income is higher, make setting aside a little bit of your leftover income in a savings account for an emergency fund part of your budget (if it isn’t already) so you’ll have extra cash to cover unforeseen expenses should they arise. Ideally an emergency fund should be able to cover your expenses for several months, but start with a smaller, achievable amount to begin with, and then add to it over time to build it to where you need. If you already have an emergency fund in place, or once you do get one set up, you’ll be able to start saving the extra income towards your other goals.
If your expenses are higher than your income, and there’s no way to increase your income through additional work, than you’ll need to find ways to lower your expenses. (I will deal with tips for this part separately, at the end, in step 5.)
4) Set up, and keep track, of your new (actual) budget.
Using the figures you determined in step three, physically write out an actual budget with a total that does not exceed your total (guaranteed) monthly income.
List all your fixed expenses first, since these do not change. Then write out all your variable expense items, and set a realistic spending limit for each one. Base the spending limit on your spending history and/or on the average bill amounts.
If you are trying to cut spending in any area, make sure the cuts and limits are realistic. It does you no good if your budget looks great on paper if you won’t stick to it.
Make sure you also create a section for your monthly savings goals.
Then, finally, write down (in a column next to your spending limits) what you actually spent on each item. Try to stay as close to your actual budget as possible, and refer back to it often to help stay on track. Make a new column for each month as you go along to keep track, and so you can continue to compare your spending habits.
Your total budget for each month should always balance. That is, your total income for that month should always match your total expenses. Keep track of all spending and account for all purchases so you can see where your money is (and isn’t) going. Record both expenses and savings.
Review your budget every few months and make adjustments to your savings goals and adjust your spending limits accordingly until you find a balance that works for you and is right for your family. You may also need to review and adjust your budget if your family size changes, your expenses or income change, or if your family’s goals change.
5) Be smart with your money.
Try to find ways to lower your expenses. Involve your entire family to help come up with ideas and to make the budget work. Even little things like walking or riding a bike to school or for short trips instead of driving so you save money on gas can add up to significant savings over time.
Below are some suggestions and tips on how to lower expenses and save money in little ways that can amount to important savings in the long run. The more things you do to cut out extra spending, the more you’ll save, and the more you’ll be able to contribute towards reaching your goals.
- Walk or bike whenever possible instead of driving.
- When you are driving, try to combine errands into one trip, and if possible, park in a central location for multiple stores/businesses and walk in between them instead of driving to each separately.
- Eat out less or cook meals at home instead of eating out.
- If you already cook all of your meals, try to buy fresh ingredients as much as possible to lower costs.
- Compare prices at your local supermarkets and farmers markets to find the best prices.
- Look at the weekly store ads they send you in the mail and try to buy items when they’re on sale.
- Use coupons and combine them with sale prices for maximum savings.
- Consider buying value brands/generic items when possible.
- Eliminate small costs that aren’t necessities, for example, use cloth hand towels that you can wash and reuse instead of paper towels.
- Instead of buying soda, make tea, or better yet – drink water!
- When you do go shopping, make a list and stick to it! Buy only what’s on your list and what you really need. Don’t get distracted with impulse buys. A good way to make sure this doesn’t happen is to not go shopping when you’re hungry, as you’re less likely to pick up extra junk food or “goodies” that you might otherwise grab if you were shopping on an empty stomach.
- Buy in bulk if the unit price for that item is cheaper that way, but only if it’s a product that you use regularly enough that a bulk purchase makes sense – and only if you will use all of the item before it goes bad.
- When shopping for non-grocery items, like clothing, furniture, or anything else, determine if it’s something you really need before spending any money on it. If possible, wait a few weeks to give yourself time to think about it and see if you still want/need it.
- Compare prices not only in stores, but also online.
- Whenever possible, see if you can get the item cheaper by purchasing it used. You can look through classifieds, your local pennysaver, craigslist, or even second hand stores or yard sales.
- Also, buy the items that only have the features you really need, don’t spend money on “extras” that you really won’t use, or aren’t necessary.
- Always ask yourself if it would be better to spend the money on something else, or even save it, before you decide whether something is worth purchasing or not.
- Pay your bills on time to avoid late fees, and if possible, pay online or over the phone so you don’t waste money on stamps.
- Be careful when using credit, and use it wisely by only charging what your budget allows. If you can’t pay the balance off each month you will have to pay extra finance charges that can add up fast.
- Save money on your heating and cooling costs by setting the heater slightly cooler, and the air conditioner slightly warmer. You can always wear warmer or cooler clothes to make up for the difference. A few degrees change on the thermostat can make a huge difference on your bills.
- Also consider using fans instead of your air conditioner whenever possible, and try to let the sunlight in when it’s cold, and to keep it out whenever it’s hot.
- Switch your light bulbs to energy-saving compact fluorescent bulbs – these make a huge difference on your energy usage and your bill.
- Use natural light instead of turning on lights when possible, and make sure you turn off lights that aren’t in use.
- Also consider unscrewing extra lights you don’t need at all. For example, if there are four light bulbs in a ceiling for a room, or in a fixture, consider unscrewing two, or even three of the four bulbs. Use the bare minimum number that you really need. I know I lived in a place once that had “vanity” lights over the bathroom mirror. There were about ten bulb sockets in one bathroom, and six or seven in the other. Unscrewing all but one or two bulbs still gave off plenty of light though, so I just left all the other sockets empty.
- Don’t leave your computer or television or any other electronic device you’re not using on if it doesn’t have to be. If it’s not in use, turn it off.
- Consider minor changes, like cooking in a slow cooker or crock pot instead of the oven, as this uses much less energy.
Make your own list of money saving ideas! Brainstorm with your family and try to think of other ways that could shave off unwanted and unneeded expenses wherever you can.
Stay organized. Keep all your papers (bills, receipts, bank statements, cancelled checks, etc) together and review your records and your spending diary or checkbook monthly. This will not only ensure you pay bills on time, but it will also help develop good financial habits and help you keep better control of your budget, and you’ll be able to plan better for the future.
Evaluate your goals often to stay motivated. Remember what you’re working towards!
There are plenty of other ideas and tips that aren’t on this list, but it should give you a good start on how to start thinking thrifty and saving, and if you follow the basics to setting up your budget, you should start to see improvement in your money management techniques within a few months.
Remember, keep track of everything, and be realistic with yourself both about what you can – and can’t – cut from your budget, and set attainable limits and goals to keep yourself motivated and on track.