With all the demands of running a family, it’s hard to find time to make a household budget — especially if the amount of money left at the end of the month is less than you want. It’s important to look household finances squarely in the eye, because that’s the only way to control them; otherwise, they control you.
Budget creation takes time, so set aside at least a few hours. It’s better to wait for a day when you don’t have pressing obligations than to cobble together a plan that doesn’t work.
Start with a goal. Maybe it’s paying off debt, or perhaps it’s a college fund. You don’t have to justify your goal to anyone, and envisioning it can help keep you on track.
Choose Your Budget Style: Paper or Electronic
Pen and paper can be just as accurate as an electronic budgeting program, but financial software certainly makes the job a lot easier. It also reduces errors.
If paper feels right, an accounting ledger doesn’t cost much and is designed for credits and debits. In everyday language, credits are incoming dollars and debits are outgoing. You’ll also need a calculator.
Electronic budgeting software like Mint.com is probably the easiest solution. Instead of writing down and accounting for each transaction manually, intuitive software creates running totals, makes suggestions, and shows how debits and credits influence each other for your bottom line.
Bring Everything to the Table
Everything that shows incoming and outgoing money, such as earnings statements, receipts, bills and bank statements, has a place at the budget table. First, separate them into two categories for incoming and outgoing, suggests U.S. News and World Report.
You’ll need a total for both categories. This is where many budgeters get a bit nervous, but don’t be. The incoming amount might be smaller than the outgoing, but a budget will help you control that.
Find Out Where the Money Goes
The outgoing category needs more attention after you’ve got a grand total. The next step is breaking debits into subcategories. Yours might be Utilities (electric, water, etc.), Secured Debts (mortgage), Unsecured Debts (credit cards), and Discretionary Spending (lunch, clothing, etc.).
Discretionary spending adds up fast. A few dollars here for movie tickets and a few more there for dining out sometimes total more than a fixed bill that you pay every month. This is the subcategory where you can create the most change.
Set Up the Ledger, Spreadsheet or Budget Software
With the initial totals and categories prepared, now you can add everything to an electronic spreadsheet, budget software or ledger. This is where the budget begins to take shape. The goal is to get your debits (expenses) less than your credits (income).
Control Discretionary Spending
With the numbers in black and white, you can approach the monthly budget more realistically. Discretionary spending might be the only category where you can find and divert money toward debt reduction and saving.
A tried and true way to manage discretionary spending is the envelope method. The money you allocate for everyday expenses goes into an envelope each month — that’s right, cash. Today Money explains that with cash in hand, you’re more aware and less likely to overspend.
Control is the first step toward peace of mind.
Pay Off Debt
Debt reduction is the main goal of many families. The only way to get there is to make at least the minimum payment each month. Paying more than the minimum obviously reduces debt faster, but it can also mean you’ll pay less interest.
Check with each creditor to be sure extra payments will post the way you want them to. In some cases, interest is a fixed amount that won’t change, regardless of whether you pay more each month.
Budgeting is both simple and complex. It’s only a matter of knowing what you earn, what you owe, and where money is spent. What makes it complex is deciding where to cut back and where to divert more money. For some families, debt is a real problem. Without enough resources, debt can mount and credit scores can tumble.
But there’s hope.
If payments are higher than you can manage and you can’t find extra money, a free credit counseling service, such as the National Foundation for Credit Counseling, can help. (Be wary of services that charge a fee and promise to reduce debt.)
A realistic budget can help you meet your financial goals for your family.