By Patrick White 2015-01-05 19:57:14
Your family’s financial security depends on developing—and sticking to— a solid game plan. According to a 2013 Gallup survey, just one-third of American families takes the time to compile a comprehensive family budget. If you’re part of that minority, congratulations. Perhaps your example can inspire the other two-thirds of us who, frankly, would rather endure dental surgery than sit down, track and evaluate income and spending and then craft a budget. (Perhaps not coincidentally, Gallup also reports that one-third of Americans haven’t visited a dentist in the last year.) In analyzing the survey results, Gallup Chief Economist Dennis Jacobe theorizes about the reasons why so few families manage their household finances with the help of a budget: Perhaps it’s due to the strain of the recent recession, or because online banking now lets us feel in control because we can instantly check our account balances anytime. Whatever the rationale, Jacobe emphasizes, “Good management of a family’s finances—and the avoidance of financial difficulties—usually involves creating a family budget.” The writers of CNN’s Money Essentials’ resource page put it even more bluntly: “Budgets are a necessary evil. They’re the only practical way to get a grip on your spending—and to make sure your money is being used the way you want it to be used.” Every business—including school nutrition programs—operate based on a budget; there’s no reason each of us shouldn’t run our family’s finances with the same care and consideration. It takes some planning and it takes commitment to stick to it, but the results are well worth the effort. Making a Plan Before you sharpen your pencil to draft a budget, it’s important to first pause to consider your goals for both the immediate future, as well as long-term. Intuit, makers of the Quicken® line of financial software products, advises that budgeting is a time when, “Each family decides what is most important to them. For example, a family with children might place education expenses as a top goal, whereas couples without children or empty nesters might opt for other goals. Your goals reflect your interests, needs, ages and income level.” In addition to budgeting to ensure that you are saving toward your key goals, this process also might be essential to help you reduce your debt. In this sense, budgeting becomes much more than just keeping track of dollars and cents; it becomes a way to be sure that your spending matches your priorities. Thinking of budgeting in this way may make the process seem more palatable—and important. Next, you need to figure out where your money is going; that is, what and how much you’re spending your money on now. Some experts recommend looking back at three months’ worth of bank statements, bills, grocery receipts and credit card records to track your “real” expenses. This exercise may reveal some surprising results (especially when you start adding up little luxuries and the impact of habits), and it can provide incentive for getting your spending in certain areas under better control. Consider that picking up coffee and a bagel on the way to work might only cost $5 each time—an amount that seems easy to dismiss. But that accounts for roughly $100 a month and $1,200 a year, which is a dollar figure that becomes much more meaningful. Make sure you track all your expenses, especially the ones you pay for in cash, for which there are not regular monthly statements but still can pack a financial wallop. Don’t overlook such areas as other meals out, the dry cleaners, the post office, the gas station and so on. Building a Budget Once you know how much you are spending, how do you calculate how much you should be spending on certain budget categories? We all know that providing for a family, no matter its size, is expensive. But just exactly how much does it cost? The Economic Policy Institute (www.epi.org) makes it possible to get a customized answer through its intuitive Family Budget Calculator tool. This interactive form lets users get a quick look at how much an average family of any given size needs to live modestly but securely (at twice the federal poverty level) in their specific geographic area. Based on family size and location, the calculator provides theoretical cost estimates for housing, food, child care, health care, taxes, transportation and incidentals. Seeing the totals for each category can be a real eye-opener (“A year’s worth of food costs that much?!”), and hopefully it can serve as a powerful motivating tool to help you take charge of your real-world expenses by providing a realistic idea about areas that you can and can’t cut down. LearnVest (www.learnvest.com), which offers customized financial planning services, recommends that families follow a “50/20/30” budgeting strategy. While every family’s financial situation is unique—incomes can vary widely, goals will be different and so on—this is a budgeting model that can be applied in virtually all circumstances. This approach holds that fixed expenses should comprise no more than 50% of monthly take-home pay. LearnVest defines “fixed expenses” as rent/mortgage, utilities, auto loan payments and similar charges that don’t vary from month to month. The organization also notes that because this is the largest share of expenses, it is also the best place to look when trying to reduce costs. Can you eliminate a monthly subscription, find a cheaper smartphone plan or a less-expensive cable/Internet bundle? Next, at least 20% of your income should be directed toward creating a secure “financial foundation”—this includes paying down debt, making retirement contributions, adding to savings and so on. Many experts recommend that, due to interest expenses and the impact on your credit profile, those with high consumer debt should make paying down that debt a priority (see “Balance Due!” on page 18 for more details). Finally, a maximum of 30% of income should be devoted to “flexible spending,” which means food, gas, entertainment and other day-to-day living expenses. “If you’re just starting to put together a budget, the 50/20/30 guideline can serve as a useful benchmark for how to divvy up your paycheck,” LearnVest writers advise. “When it comes down to it, though, how you spend (and save) your money depends on your specific goals and lifestyle.” In other words, you may need to make adjustments or adopt a different strategy. But whatever approach you choose, successful budgeting requires having some kind of plan. The essence of budgeting can be boiled down to a simple bit of wisdom: Spend within your means. It may sound selfevident, but the whole point of a budget is to balance expenses with income. Sports Illustrated estimates that 78% of NFLplayers and 60% of NBA players will file for bankruptcy within two years of retiring. Many of these professional athletes have earned millions of dollars during their careers, but spent even more. Don’t lose sight of the lesson: It doesn’t matter how much money you make; it matters how much you spend relative to how much you make. Keep It Simple Financial experts say that one of the key reasons why more people don’t budget is the intimidation factor. “Budgeting” conjures up scary thoughts of spreadsheets and balance sheets and….math! It doesn’t need to be that difficult, writes Today.com financial writer Laura T. Coffey, whose No. 1 rule for budgeting is “opt for simplicity.” What this means is that “you can harness the power of Excel® spreadsheets, Quicken and other software programs, but there’s also nothing wrong with using an old-fashioned pencil and piece of paper.” That said, for those who are technology-oriented, there are plenty of apps, online sites and software packages available to help simplify the budgeting process. Kiplinger, for example, provides an online Household Budget Worksheet (www. kiplinger.com, then click “Spending,” then “Tools”) that directs users to input family income and then breaks down typical expenses into several broad categories: loans, utilities, insurance, savings/ investments and miscellaneous; each of these are broken into many more sub-categories, as well. This provides a very easy-to-follow, detailed, single-page look at where your money is going. It also shows the correlation between one category and another; scale back on the amount you budget for clothing, and there’s more money in the pot for savings or vacation or date night. At the very bottom of the page, fittingly, is the bottom line: “Income Minus Expenses.” This figure continually changes as you make budgeting adjustments, and the goal is to keep the bottom line positive! Simplicity also means that budgets can and should focus on the big picture. Budgets allow you to set the parameters for key categories. But it’s up to you to keep a watchful eye on your (and your family’s) spending within those categories. In other words, while details are important, there’s no need to get too bogged down in them when creating your budget. Noting, “I’ll buy new underwear in September, but not at a cost to exceed $11,” might be getting a bit too much into the weeds. Track Your Spending The most well-thought-out budget means nothing if you don’t continually track whether your spending is falling in-line with the limits you’ve established. This can be done manually by tabulating the total dollars spent in each category of your budget at the end of each month. But just as there are electronic tools to help in creating a budget, there are also apps to help you track your spending. Mint.com, for example, offers a smartphone app that allows users (some 2 million at last count) to develop a budget and then analyzes and categorizes actual expenses via your bank records and financial statements. It shows your progress with charts and graphs, and also will send automated email or text alerts if you’ve spent more than was allocated for a given category. Other similar apps include Level Money and Billguard. Knowing how you’re doing in relation to the budget you’ve laid out is particularly important in the event that your income or other life circumstances change. “A raise or a job loss typically calls for a reassessment. As the months go by, you can review your actual spending against your budget and make further adjustments,” recommends Intuit. “Tracking your budget and comparing it with actual expenses is a great way to test the realism of your estimates and to help maintain your spending discipline. By carefully choosing your goals, controlling spending and increasing savings, your family can achieve its most important objectives.” Just Do It You don’t have to be excited about the prospect of building—and living by—a budget, but it’s important to recognize that this is an essential step in managing your family’s finances responsibly. Keeping it simple, and taking advantage of a few tech tools, means that the experience doesn’t have to be as dreadful as it might sound to those who have procrastinated on such tasks for a lifetime. Give yourself permission to make mistakes and recognize that it’s not going to work perfectly from the get-go. As Family Budget Basics, a publication of Money-Zine.com, emphasizes, the value of budgeting comes as much from the process as from the end product. “Everyone has to start somewhere, and that includes making mistakes and even creating unreasonably demanding budgets,” it advises. “The single most important learning experience occurs during the budgeting process. Going through that exercise is extremely helpful in understanding a household’s financial strengths and weaknesses. Taking a close look at sources of income, and gaining insights into spending patterns, allows families to develop even more money saving ideas.” Patrick White is a freelance writer (and not, he insists, an expert financial planner) in Middlesex, Vt., and a former assistant editor of this publication. Photography by iStock/Jiunlimited.com.
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