Most of us know that a budget is a very basic, but important, way to handle finances. A well-designed family budget not only puts you in control of your money, but it also brings peace of mind, improves family relationships, and helps relieve financial stress.
Many Canadians bypass a budget because they think it will be too difficult to create or follow. Or, they may not want to face the fact they are spending more money than they have. However, taking a head-in-the-sand approach to dealing with family finances can spell disaster.
If you don’t have a budget, there’s no better time than now to make one. Here are five easy steps to creating a successful family budget:
1. Assess Your Finances
The first step in building a livable budget is to find out how much money is coming in and going out. Start by writing down all of your debts, the balances that you owe, the payment amounts, and when your payments are due. Then, determine how much money you bring in each month on average. This will give you a better idea of what you have to work with.
2. Track Your Spending
Next, you’ll need to track where your money is going each month. Make sure that all members of the family who spend money keep track as well. Sometimes it is easiest just to have one person who crunches the numbers and other family members keep receipts and hand them in. Make sure everyone keeps a running log of their daily spending too. Trips to the store or vending machine are often overlooked, but they add up fast.
Another important step is to review and balance your chequing account statement monthly. You may find that you are paying fees that can really increase costs. For example, if you have overdraft protection on your account, and you are using it regularly, you may be paying a fee every time a purchase goes through on the overdraft. Some savings accounts have a fee attached every time you made a withdrawal. In that case, instead of withdrawing regularly from savings, it might be better to do a monthly withdrawal, and pay that fee only once each month. All these fees can really add up.
You will need to keep the log of your spending habits for three months. After that, average the amounts you spend in each category to determine what you are actually spending. Sometimes this process alone provides some surprises. If your spending does not reflect your priorities, this often provides an incentive to change spending habits.
3. Set Goals
After assessing your finances and tracking your spending, you are ready to set realistic financial goals. Saving for unexpected expenses and paying down debt are excellent goals that will establish a foundation of strong financial health. Goals are really the basis of your budget. They’re what keep you on track.
Set short term goals to meet immediate needs such as beginning a savings account, small home improvements, and gift giving. Medium term goals, those you plan to reach within two to five years, might include paying down debt, a family vacation, or saving a down payment for a car or a house. Long term goals, such as saving for a college education or retirement, are equally important and won’t happen without careful budget planning.
It is important to have some of each — short, medium, and long-term goals. The shorter term goals are relatively easy to accomplish, but they will give you the encouragement you will need to stay on your budget so that you can meet the more important medium and long term goals.
4. Make Your Budget
Next, you can set up your budget using the averages of the amounts you spend on various categories, such as food, utilities, and gas. Then allocate that amount to each category. Separate out the costs that are essential — rent/mortgage, utilities, loan payments, etc. These are largely non-discretionary. You may be able to make some adjustments to them, but they are expenses that you cannot avoid. Then take a look at all the discretionary expenses — coffee on the way to work, entertainment, gifts, etc. These expenses you have more immediate control over, and it is in this category that you may find the biggest surprises.
When you have added all your expenses up, based on what you actually spend each month, you will be able to see if you are living within your means. Is there room to plan for some goals? If not, you may want to look first at some of your discretionary spending. Can some things be eliminated or reduced? After you have done that, take another look at the non-discretionary expenses. Could you reduce your utility costs — perhaps by turning down the heat when the family is all out of the house during the day — or change your cable package, or cook more often at home instead of eating out? All those things can be considered. If you have goals that the entire family wants to accomplish, you will find the incentive is there to make some changes in your spending habits.
5. Review and Revise
Be ready to make changes in your budget. Budgets don’t always work the first time. You may find that you’ve allocated too much money towards food and not enough towards savings. Look over your budget and adjust it as necessary, and be patient with yourself as you fine-tune your budget.
Once you have a budget that works for you, you need to continue to monitor your spending to make sure you are staying on course. You will also need to adjust the budget as life happens. Your job may change, you may expand your family. With each change, you need to reassess your budget and make adjustments. Even if everything is staying about the same, the cost of living changes over time. Also, as you meet your goals, you will want to establish new ones. It is a good idea to plan on revisiting your budget annually to keep it current.
A successful family budget is the key to long term financial health. Using these simple steps, you will be able to work together as a family to build a budget that helps you reach your goals.
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Leigh C. Taylor, LIT
