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. It’s no wonder, as the Federal Consumer Information Center points out, millions of Americans, especially middle-income families, are in financial distress because of their debts and spending habits.
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 important 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 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, besides failing to follow a budget, is the failure to include all expenses. It’s an easy oversight with costs that don’t occur 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 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 a 12-month period, or budget for the high side.
Finally, little day-to-day expenses are frequently overlooked. Over the course of 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 expenses include replacing a toaster, repairing the garbage disposal, and the countless other repairs and replacements over the course of 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 a full year. When totaled for the whole family, this is often an eye-opener. Under this category, include 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 expense.
Determine 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 just over 4 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.
Balance Your Budget
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 check mark 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 check mark, determine which are unnecessary, and begin cutting or reducing. Your cable connection might be a good 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 devise a plan to reduce several costs rather than completely eliminate a couple, thereby avoiding the 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.
Average Monthly Expenses Average Monthly Income
Rent/Mortgage 800 Mary’s net pay 1700.00
Homeowners Ins. 25 John’s net pay 1700.00
Property taxes 150 Child support 200.00
Gas (heat) 50 3600.00
Telephone/cell phone 60
Auto loan 200
Auto fuel 60
Auto insurance 100
Auto maintenance 40
Life insurance 20
Credit card payment 25
School lunches 40
Household misc. 50
Pet expense 25
Eating out 50
Misc. 50 Total Income 3600.00
Savings/IRA 100 Total Expense 3220.00
3,420 Balance 380.0