by Kimberly Blaker
Sixty percent of today’s families rate their finances as poor to fair, according to a 2015 report by Pew Research Center. Yet, a 2013 Gallop Poll found only one-third of Americans prepare a budget. As a result, millions of Americans are in financial distress because of their debts and spending habits, as pointed out by the Federal Consumer Information Center.
Without a budget, even some of the savviest parents find raising a family an ongoing financial struggle. When finances are tight, creating and using a budget is vital to both preventing financial difficulties and attaining financial security. It can make the difference in being able to save for family vacations, kids’ college funds, or retirement.
Calculate Your Monthly Expenses
Budgeting consists of determining your income and expenses, making necessary adjustments to your cost of living, and following your budget religiously.
The first step in creating a budget is to determine your monthly income and expenses. One of the biggest problems in budgeting (aside from failing to follow it) is the failure to include all costs. It’s an easy oversight with expenses you don’t incur on a regular schedule, such as vacations, gifts, auto maintenance, clothing, and extracurricular activities. Bills paid quarterly or annually, such as life and homeowners insurance or property taxes, are often forgotten as well.
Another error people make is the temptation to budget for the best-case scenario with fluctuating bills such as gas and electricity. So be sure to determine the average cost over 12 months, or else budget for the high side.
Finally, small day-to-day expenses are frequently overlooked. Over a month, these add up to a heap of change. This includes allowances, eating out, buying a newspaper, school lunches, pet expenses, entertainment, or stopping for a pop or candy bar. Other overlooked costs include replacing a toaster, repairing the garbage disposal, and countless other repairs and replacements over a year. Brainstorm and create categories for all these types of expenses to include in your budget.
Now determine your monthly expenditures for bills that fluctuate from month to month by adding up the previous year’s bills. Add 5% to account for inflation. Then divide by 12 to get a monthly average.
For categories like gifts or clothing, calculate what you spend in an entire year. When totaled for the whole family, this is often an eye-opener. This category includes back-to-school shopping, outerwear, footwear, underwear and socks, sportswear, summer clothing, work wardrobe, and casual wear. Add the total expense for the year. Then divide by 12 for your average monthly spending.
The Positive Side – Determine Your Monthly Income
Determining your monthly income is simple if you work the same number of hours each week and receive an hourly wage or salary. Just multiply your weekly take-home pay by 4.3 weeks since there are nearly 4 1/2 weeks in a month.
If your income varies because of commissions, overtime, or self-employment, calculate your average weekly pay, then multiply it by 4.3.
The Balancing Act
To determine the difference between your monthly income and expenses, add up each column individually. Then subtract total expenses from total income.
Hopefully, you’re earning more than you’re spending. If so, you can create a savings plan for your child’s college fund, make additional deposits to your IRA, or increase your emergency savings.
If you have a negative difference, you’ll need to cut costs. Place a checkmark next to each item you can’t reduce. This might include mortgage or rent and fixed loan payments.
Next, from the items that don’t have a checkmark, determine which are unnecessary, and begin cutting or reducing. Your cable connection might be an excellent place to start. The vast number of channels offered by cable companies often keep kids glued to the TV. The benefits of not having cable might help justify cutting the cost.
Other items you can reduce include dining out, entertainment, vacations, and gifts. You might also be able to reduce some of the essential categories, such as clothing, grocery, and miscellaneous expenses. First, determine how much you must spend to have your needs met. Then continue cutting and reducing until your budget balances, or preferably, has a positive balance to cover savings, emergencies, and miscalculations.
Keep in mind when making reductions, you need a realistic, detailed plan you’re able to stick to. You might want to devise a plan to reduce several costs rather than completely eliminate a couple if it helps reduce your temptation to break the budget. Or vice versa. Just be sure to think it through.
Don’t Get Sidetracked
The final step in budgeting is to stick to it. That’s where it’s easy to go astray. To remain within your budget, track unfixed expenses such as vacations, entertainment, clothing, gifts, and miscellaneous. Buy a ledger, and label a separate page for each category. When you dine out, log the expense to ensure you don’t go over your allotment by month’s end.
Also, keep in mind, when extra cash is floating around, it’s tempting to assume the money’s available to spend. Remember, your budget is based on averages. This means the extra $100 or $1000 sitting in your bank account must be available to cover another expense down the road, such as property taxes or back-to-school shopping.
Attaining financial security requires self-discipline to live within your means. By setting up an accurate budget and sticking to it, you’ll not only avoid debt and financial hardship but the stress that usually accompanies it.