In this article, we take an in-depth look into why maintaining a household budget is so important to the financial success of you and your family.
The Myths & Realities of Household Budgeting
There are a number of reasons why many of us do not create or live by a budget. Many of these reasons are based on false assumptions or myths. The following are a few such myths and their corresponding realities that may help us overcome our own resistance to budgeting.
Myth # 1: If I had more money, all of my problems would be solved.
Reality: Actually, spending less than I earn may solve many of my money problems.
Myth # 2: Budgeting is for people who are in debt.
Reality: Budgets are for anyone seeking to stabilize their finances and build debt.
Myth # 3: If I balance my checkbook, that’s as good as budgeting.
Reality: The checkbook can’t help me prepare for unexpected expenses like car repairs or doctor visits. Budgets can!
Myth # 4: Following a budget inhibits my freedom of choice.
Reality: Following a budget increases the likelihood that I’ll take care of my financial priorities first, such as housing, food, savings, and transportation.
If you identify with one or more of the above myths, then make a personal decision to implement the “realities” into your thoughts. If you still have difficulties budgeting, remember this:
“If You Don’t Control Your Money, It Will Control You”
Step-by-step Budgeting Instructions
For many, monthly budgeting appears to be a complicated task – too overwhelming even to attempt. Below you’ll find a step-by-step description of how to make a budget you can live with.
- Be honest. Don’t try to make your budget “look good.” The budget is for you, so be honest with yourself.
- Set 3-5 financial goals and priorities you hope to achieve, e.g. make a 10% down payment on a home in 5 years.
- List your expected monthly income for the coming month.
- Estimate your expenses for the coming month, including fixed and variable expenses, and keeping in mind infrequent items such as oil changes and car licensing fees. Try to categorize them into 5-10 groups.
- Keep track of your actual spending, even if it’s just 89¢ for a pack of gum. Enter what you spend from each categorized group from step 4.
- Identify your “Budget Busters” – habits and expenses for small items that have a big impact on your spending. Examples include daily coffee, cable TV, eating out, and other personal habits.
- Set goals on how to bring these budget busters under control.
Compare your actual spending with your projected (budgeted) spending. Consider adjusting either your budget or – more difficult but more effective – your spending habits and or/your lifestyle.
If you have any questions, would like to discuss your financial challenges, or are just looking for advice, please contact us at your convenience. As always, we are here to help you and look forward to hearing from you.
If You Live Within Your Budget, You Will be Much More Likely to:
- Avoid excessive debt.
- Build emergency and long-term savings accounts.
- Take care of financial priorities such as housing, food, and transportation, rather than disproportionate spending on entertainment and dining out.
- Establish regular investing habits in preparation for retirement.
- Feel in control of your finances.
- Understand your personal spending habits and eliminate wasteful expenditures.
- Be in a position to take advantage of financial opportunities, whether it’s for something on sale at the store or a chance to greatly improve your investment portfolio.
- Prevent many of the arguments spouses have with regards to spending and finances.
- Make more than monthly minimum payments to credit accounts, including credit cards, mortgage, and auto loans.
The Importance of Creating a Backup Budget
With layoffs on the increase and the national job market on unsteady feet, our financial futures can sometimes seem uncertain. When employees get laid off, too often it takes a week or two to get a psychological handle on the situation, which means that, financially, it may be too late to adapt.
Once you have a spending plan (budget) in place for your current situation, it’s time to create a “Backup Budget,” a plan you could put in place should you ever lose your income or have your income reduced. Your Backup Budget helps you prepare to pay for your basic needs and high priority wants with any severance package or savings plan you might have.
Here’s how to create your Backup Budget:
1. Consider what sort of “Survival Resources” you’ll possibly have in order to fund your budget. It could include:
Savings: Ideally, we should have 3-6 months of survivable expenses available to us in savings accounts, certificates of deposit, money market accounts, and other easily accessible funds.
Unemployment: Usually just 50% of your recent income for up to six months. Remember, though, that you probably will not qualify if you initiate the termination yourself (i.e. you quit rather than you are let go).
Severance: Sometimes 2 or 3 months of salary, though there is certainly no guarantee of receiving anything.
Disability: Approximately 60% of your salary for about six months, if you qualify.
2. Decide which expenses you could live without in a pinch
Generally, these will include cable/satellite TV, movie rental club, entertainment, dining out, debt payments beyond the minimum requirements, children’s activities, tobacco, alcohol, lattés, gift giving, charity, etc.
If you have children and are paying for daycare, look at reducing or eliminating this expense until you are employed full-time again.
For pet expenses, eliminate the gourmet pet food and “play toys” and reduce the veterinary visits. Take advantage of being at home to spend more time with your pet(s).
3. Add up you survival expenses, which include:
- Mortgage: Contact a HUD-Certified housing counselor if you lose your job. They can help you find repayment programs and options while you’re without income.
- Utilities: Get on level pay with your utilities to make your budget more predictable.
- Groceries: Aim for $100-$125 per person per month. This does not include dining out.
- Insurance: Consider raising your deductible to lower your premium. Also, consider COBRA health insurance coverage, since the 2009 Stimulus Package may cover up to 65% of the premiums if your employment is involuntarily terminated.
- Clothing: While between employment, check out thrift stores for necessary clothing.
- Prescription Drugs: Consult with your doctor to see if there are alternatives or generic versions that may cost less.
- Transportation: Consider downsizing if necessary
4. Compare your new “Survival Expenses” with your “Survival Resources” to determine how long you can afford to continue in such a survival mode. If your resources are too thin, endeavor to put more away into a savings plan now while you have income.
5. Finally, avoid the temptation to raid your retirement funds. IRA’s 401(k)s and other accounts can often be accessed, but these actions carry stiff penalty fees.
The single biggest financial mistake people make when they are laid off or otherwise lose their current income is this:
Failure to Adapt Quickly to their new Reality
Creating a Backup Budget will help you be ready in case of income reduction or elimination. Taking an hour or two to prepare one might save your financial life.
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