Probably one of the most frequent questions I have received at my financial seminars has been about how to create an effective family budget. The concept is simple, but most people are unable to create a budget that actually works. Today, I want to discuss the concept of budgeting and some of the different methods I have seen people use over the years that have been successful. Before even getting into the whole topic of budgeting, I think we all have to ask why? Why should we have a budget? Why should we stick to our budget? What difference will a budget make anyway? If you don't have answers to these questions, it is likely that you will lack the motivation and fortitude to make your budget work.
In my mind, a budget is simply a means to an end. Regardless of what financial book or system you decide to follow, there is one common principle. In order to get ahead financially, you must spend less than your income. If you want to increase your spending, I have no problem with that so long as your income keeps up with your spending. Ideally, you should be saving a minimum of 10% of your earnings. In addition to that, I believe it is important to set aside something every month for charitable giving. Some people give more than 10%, others are happy with 10%, and still others give far below that. If you start with the premise that you are going to save 10%, and give away 10%, and pay your taxes, then you'll likely be living on about 60% of your gross earnings.
One of the reasons many people cannot make their budget work, is they simply have too many debts. When you make a commitment to paying off your debts, you will find it very easy to manage your family budget. Once the car payments and credit card payments are gone, you're simply down to just a few items to keep track of. This may sound idealistic, but many people have joined the movement of becoming debt-free. My wife and I both drive older model vehicles and we are happy to do so enjoy and not have a payment. These are lifestyle decisions that each person must make for themselves. When I was younger, I had a new car every couple of years. Now, I find myself enjoying my 2002 Ford Escape much more than any of my shiny new cars that had monthly payments.
Some Of The Most Popular Budgeting Methods
1. The Envelope System
The idea behind this system is that you create an envelope for each spending category. Each time you receive a paycheck, you cash it and then place the money in the envelope for the various categories as you have budgeted for them. Once the money in an envelope has run out, you can no longer spend money on that category. This is especially helpful with discretionary spending. For example, if you have $100 in your entertainment envelope and you spend it all by the middle of the month, you will have to be disciplined enough to avoid spending any more money that month on entertainment. For many people, the Envelope System is very effective because it allows them to actually see the money coming in and going out of each envelope. This "visual" is the best way for them to stay in touch with how much they are actually spending. An innovative website MVelopes provides a virtual method of using the envelope system without keeping all that cash around.
2. The Budget Kit
A great budgeting workbook that has been around for more than 15 years is The Budget Kit by Judy Lawrence. This book seems to have really met the test of time and is a perennial best-seller in the personal finance category. There is nothing magical or mystical about it, just a very straightforward book with all the forms and worksheets that you will need to set up and manage a family budget.
3. Budgeting Software
Most of the major financial software products, will include a module for establishing and managing a budget. Quicken and Microsoft Money are two favorites that seem to have widespread approval in the marketplace. If you are comfortable using your computer, finding a software program may be your best option. There is plenty of competition out there in money management software. In fact, if you do a simple Google search you will find literally dozens that you can choose from.
Keys To Making A Budget Work
1. Keep Track Of Your Spending
Regardless of what system you use, you will have to find a way of keeping track of where your money is going. Many people find it easy to carry a small notebook and make journal entries. This process in and of itself will become very useful to you. Once you begin to realize how much you are spending per month on coffee, snacks, and other discretionary items, it will very quickly get your attention. Most people learn very quickly that these "small purchases" can really add up over the course of a month.
2. Create A List Of Your Fixed Expenses
These are the easiest expenses to list in your budget. Included here would be any fixed debt payments, mortgage or rent, or other regular recurring payments that are roughly the same amount each month.
3. Create a List Of Your Variable Expenses
This is a little more difficult to do and will take more time. It is normal for a family budget to fluctuate from one month to the next. It is important that you build in some degree of flexibility and margin of error when planning for what are known as variable expenses. Even though we don't know exactly how much money we are going to spend on a variable expense, we can still set a maximum and establish a range. This way, even if we spend toward the top of the range on a given item, we are still within the budget for the month. A perfect example of a variable expense, would be the cost of gas. Price of gas continues to fluctuate wildly, and depending on your weekly schedule the amount of money you need to keep fuel in your car will vary. This is the same for utilities as well.
One big mistake that is often made is not including everything in a family budget. For example, you need to include things like haircuts, clothing, and even some money could be saved each month towards vacations, etc. Instead of guessing on these items, is probably a good idea to look at your actual expenditures over a 30 to 60 day period. If you are keeping track of every dollar you spend, you can go back and use these figures as the basis for establishing an amount for them in your budget.
4. Make Sure There Is Money Set Aside For Entertainment And Other Discretionary Items
Some people make the mistake of creating a completely impractical budget. This is like going on a starvation diet. Don't attempt to financially starve yourself by leaving no fun money in your family budget. The result of this will be an unrealistic budget that you will quickly give up on. It is important that you have reasonable constraints on your spending, but the key word is reasonable.
There is no perfect budget system. Everyone that lives on a budget will occasionally spend too much. Even if you don’t completely live up to your budget, you will be in much better shape than if you did not have one at all. Over time you will get better and better at controlling your spending and making smarter choices. Budgeting is not about doing without, it is about choices. Would you brown bag it for six months if you could take a nice vacation? Would you bring your own coffee instead of stopping at a coffee shop, if it meant that you could buy some new clothes? There is no right or wrong answer to these questions. The only wrong answer is to spend more than you have coming in. If you are a single person, I would expect that you would have a much larger percentage in your budget for entertainment. We can all set our own priorities as long as we keep the end goal of living within our means as the focus.
What method are you using to budget? Please add your comments below or post to Twitter and follow your post with #familybudget and we can start a conversation.
Helping you make the most of God’s money!