A Budget That Works
Like it or not, money is an important part of our lives. You've heard the cliché, "Money can't buy happiness." That may be true. But a lack of money can certainly contribute to a lot of unhappiness!
Properly managed, money can enhance family relationships. Money can be a springboard for family discussions that will help the entire family pull together for common goals. Not properly managed, however, money becomes a great curse.
A family staggering under the oppressive weight of debt is obviously under more strain than the debt-free family. Yet modem society has encouraged debt. It is considered "normal" to run up sizable credit debts. But just because it is "normal" doesn't make it the best form of money management. Rather than go into debt, the average person should set about to get out of debt — and stay out of debt. But where should one start?
A Long-Range Plan
Most of us have taken many years to establish our spending habits, accumulate our debts and dig ourselves into financial holes. It is not easy or logical that we should be able to snap our fingers and get out of debt and on a sound financial footing by next week. Not even next month. Maybe not even next year. But a sound plan, carefully thought out, can bring financial success in the future.
We live in a "now" oriented society. We want everything done yesterday, or by tonight at the latest. But this is not realistic. What you need to do is lay out a practical long-range plan. Find out exactly where you are right now. Get all your financial bills and statements in order. It may not be pleasant to find out how deep you are in debt, but you might as well face it. Otherwise, you'll continue in the same old rut digging ever deeper.
Once you have noted all your debts, put down what you realistically can expect in the way of income. If you are typical, you'll find your debts cannot be paid off right away. That's where budgeting comes in.
To many people, going on a budget is distasteful. It's like going on a diet. Or like being told, when you were a child, to go to your room. It seems like punishment for alleged wrongdoing.
But going on a budget is what you should have been doing all along. So don't look at it as unpleasant. Setting up a budget is like getting a new lease on life. It's a way to start over. A way to make a success out of your finances. Remember, your plan should be long range.
How to Budget
The word budget means proportioning income into a series of categories. Think of it as a percentage of the money available. The budget should be divided into two categories.
The first area we will call fixed expenses. Fixed expenses are those that come every month and are about the same each month. Second, there arevariable expenses. You can also call these discretionary moneys. These are expenses we will all have, but the amount we spend from month to month might vary considerably.
Heading the list in the category of fixed expenses is the money that one gives to God. Other priority expenses usually include a monthly mortgage or rental payment, the cost of utilities, telephone, food, household expenses and transportation. There is another part of the budget over which you have little control: taxes. The government has to function and has chosen to operate on part of each person's income. In most nations, taxes are withheld before a person even receives his or her pay.
In addition to taxes, other funds may be withheld from your check. These include payment into a social welfare or social security fund, pension plans, required insurance, sometimes union dues and other smaller amounts. Since they are withheld, you have little control over them. But they must be calculated into your budget.
The three largest expenses most families incur are the cost of housing, the cost of food, and in cold climates the cost of home heating. In some cases, there will be little left after these major items. Most families will find that food and housing consume a little more than half of the budget.
Most families have at least one automobile as a principal means of transportation. Some families may be able to rely on public transportation such as buses or subway systems to provide a portion of their transportation needs. The transportation cost will also be a fairly fixed expense. A budget must be established for fuel and maintenance cost of an automobile or for the fares for transportation.
Another fixed expense is insurance. Most families carry some form of life insurance, health and accident insurance, homeowners' or renters' insurance and automobile insurance. In some nations, many of these insurance coverages are provided by the state and are part of the system of taxation one is charged. In other nations, insurance is a private matter and must be paid for separately. Many employers provide insurance programs to employees that cover life, health and accident insurance.
The variable expenses are simply what the name implies. A variety of budget areas are determined by a family's needs and are based on the amount of money available once the fixed expenses have been budgeted.
Variable expenses include the cost of clothing — a necessity, but usually not needed on a monthly basis. In addition, there is expense for entertainment, recreation, vacation and travel, savings, gifts and personal allowances. A pie chart will give you an idea as to how these expenses might be broken down in a typical U.S. family.
Remember, your budget percentages may vary considerably from these. Once you determine how you're spending your money, use the blank pie chart to fill in your personal budgetary expenses. It will help you see how you compare to the average and will help you evaluate if you need to make changes.
Where Is It Going Now?
Before you can fill in your own chart, you have to know how you spend your income. Most of us have said more than once, "I just don't know where it all goes." Or, "How come my outgo always exceeds my income?" Or, "I just can't seem to make ends meet."
The first thing you must do to manage successfully your income is to know where it all goes. Many families simply do not know. If you are not aware of how you spend your money, you have to come to grips with where it's going.
Finding out how you spend your money is going to take a little work and effort. But it can be fun. Involve the whole family in the project. Husbands and wives will understand each other's needs, and if you are discussing these matters together, the children will understand much more when you say, "We simply can't afford it."
The Three-Month Analysis
Now, you are ready to start your own personal budget analysis. Use the next three months to analyze your outgo. The work involved is well worth the effort. To help you track your expenses, see the accompanying chart.
This means keeping records of where your money goes. We've produced a worksheet that will help you keep track of your expenses during the three months. If possible, make several copies of these charts so you can experiment with the best means of keeping your own records. You will find, during the three-month analysis, that you will make changes in the way you spend your money.
There are two major ways to keep track of your expenses. Choose the one that best suits your family's needs. One efficient way to keep track of expenses is to write a check for almost all items in your budget. By writing a check, you will have a written record in your check register, and you will have a canceled check that you receive back from your bank. Be sure you write in your check register as well as on your check what the expense is for. By keeping track of the budget categories such as we recommend on the worksheet, you will be able to see where your money is going.
Of course, checking accounts are not the only way to keep records. Many families prefer not to write so many checks or to even have a checking account. If this is the case, a record book or a notebook will be helpful in keeping track of how you spend cash. It is going to require special effort by all members of the family to write down to whom all expenditures are made.
It is amazing what you will discover when you start keeping this kind of budgetary record — you find where the money really goes. Many families find they are spending far too much in some areas and perhaps not enough in others. Some will be eating out too much. Others will find they are spending too much on recreation. Others will find the car is costing too much. You will discover these things simply by writing it all down and adding it up at the end of each month.
After the first month, you will have a good idea of where all your money is going. During the second month, you will see where you might make changes and adjustments. During the third month, you can experiment with these changes. By the end of three months, you should have an idea of a permanent budget you would like to set up.
Don't let yourself get discouraged during this three-month analysis. Once you have established your budget, you probably will not need to keep nearly so detailed a record as you did during this first three months. But many families give up and quit during the budget-analysis period and never really get a grip on their personal finances.
No matter which way you choose to keep track of your expenditures, you must find out where your money is going. And during the three-month analysis, be detailed. For example, if you give cash to one of your children for a movie, be sure you allocate it to its proper budgetary area — entertainment. You don't want to have too much money going out into unaccounted-for, miscellaneous cash. You have to keep track of the flow.
At first, it may seem a bother to bring home the receipts and keep records of purchases from the grocery store, the department store or the drug store. But it will later yield good fruit when you analyze where it all goes.
And bringing home receipts can have a double benefit. Not only will it help you keep track of your budget, you will have a receipt in case you need it to exchange an item or have repairs made. How many times have you been unable to find a receipt when you needed it most? If you have a standard place where you put all your receipts, they will always be available. You don't have to set up a complicated filing system. A shoe box will do quite well. Perhaps a special drawer in the kitchen or bedroom will serve the purpose. Of course, you can set up a detailed accounting and records system if you desire, or get a computer program to help. But even a simple system is better than none.
Sticking to Your Budget
After three months, you will have a good idea of what you have been spending and how you ought to spend your money. If your family project has been successful, each family member will understand his or her individual responsibility in guiding the family to financial success. There will be many temptations to vary from the budget you establish. But do your best not to vary from it.
Of course, how much you have in the various budget areas will depend on your outgo and the cost of living in your region. If you find that there is enough money for your variable expenses, you will have what we call "discretionary" funds available for personal expenses. Sending the children to summer camp, buying a new stereo or increasing the children's allowance are all nice if we can afford them. But don't let anything deter you from your goal of successful family budgeting.
Finding Your Financial Worth
As the years go by, it's surprising how much value an average family can accumulate. If you've purchased a home, furniture, jewelry and other items of permanent value, you will find you have established a net worth considerably more than you might at first think. Perhaps you have a savings account, value in a retirement or annuity plan, stock investments or cash value in a life insurance policy. While you may be struggling to make ends meet, you may also find you have been accumulating a personal worth in excess of your expectations.
In order to establish financial goals, you should know where you stand. You must get control of your budget. A major reason to get control of your budget is to be able to control expenses and to establish financial goals.
So how much are you worth? The net worth chart will help you determine your net worth. Gather your records together and fill out the chart. It may surprise you how much — or how little — value you have. To properly fill in the blanks, you may need an updated estimate of your home or other possessions. You can estimate the value of your automobile by looking in the classified pages of your newspaper to see what similar cars are selling for. By visiting a furniture store you can see how much your furniture may be worth or what it would cost to replace at today's value.
You should have easy access to the balance in your savings account and other financial investments. Your insurance agent can let you know the cash value of a life insurance policy. To figure your net worth, add up your assets, then subtract from them all your liabilities. The bottom line is how much you are worth financially.
Planning Your Financial Future
Where do you go from here? That depends on where you find yourself now. The three-month analysis, accompanied by your statement of net worth, will help you see where you must place your financial priorities. If you are deep in debt, obviously, your first goal will be to get out of debt.
On the other hand, if you are fairly secure financially, you will want to establish some goals. Click here for a chart to help you set up your money plan. Depending on your circumstances, those goals might include any of the following: the purchase of a home, college education for the children, planning for retirement, care for aged parents. Those goals will vary from family to family.
But the most successful way to plan for your future is to establish sound budgeting principles here and now. The best goal of all will be to establish your partnership with God and develop the self-determination to know how to budget your income.
The purpose for your budget is to make your money do what you want it to. Many people have given in to their desires and extended themselves beyond safety in money management. You simply can't budget and spend more than you have coming in.
Typical long-range goals are savings for college education for the children, paying for appropriate life insurance, a paid-off mortgage and sufficient funds for retirement.
Mid-range goals include furnishing the home, purchasing and maintaining an automobile and perhaps a special vacation. Shorter-range expenses are clothing, food, utilities and recreation.
You should make out your own list of goals — long-, medium- and short-range. But as you set down your goals and develop your budget, keep these points in mind: