Simple Steps to Create a Household Budget The first step to financial success is creating a practical and responsible budget. BY TIM KIRCHNER
When money's tight you have to tighten your budget.
“ Although sometimes it may seem like it, managing money is not a mystery it just takes a little time and effort.”
If the past year has taught us anything, it’s that financial catastrophe can strike at any time—and that most people aren’t prepared to handle the rainy days. In fact, a recent MetLife study showed that more than half of Americans live paycheck to paycheck—and these days, some of us feel lucky to have a paycheck at all!
Being married presents unique challenges when it comes to saving because it’s often true that opposites attract, and saving habits are no exception. Many times, one person tends to be a saver, while the other partner might be a bit more impulsive. The fact is, both sides of the marriage equation need to be united when it comes to financial issues, even if that means one person needs to be named the designated driver over the funds; otherwise, it will be difficult to save any money to finance your dreams.
Although sometimes it may seem like it, managing money is not a mystery it just takes a little time and effort. There are basically three components: budgeting, saving and investing. Once you master these basics, you should be on your way to achieving your goals.
The first step to financial security involves putting together a budget—and sticking to it. This may be harder than it sounds because most people don’t know where their money goes; all they know is that it’s gone too soon. If you’re like most people, incoming funds are fairly predictable, and usually involve a paycheck or sometimes earnings on savings and investments. Money going out is often harder to keep track of, and yet, it’s the most important thing to pin down.
To start the pinning process, make a list of all the items you spend money on each month: rent or mortgage payments, utilities, transportation, food, and so on. Keep a daily record of all these expenses—these days, there are effective software packages that can make it easy (Mint.com for example, will sync with your online banking to track this information). Document every purchase by getting a receipt for everything you buy from that first cup of coffee on Monday morning to the movie tickets on Saturday night. Record everything you spend, including how you pay for things: cash, debit/credit card, or check.
Creating Your Expense Record
At the end of one month, take this information and create an expense record. List all the expenses you incurred that month and try to fit them into a specific category (clothing, car payments, etc.). Then, take a few minutes to think about items that you pay on a semi-frequent basis that may not be reflected, such as car insurance payments or the water bill. For these items, divide the payment you made by the number of months the payment covers. Write down that amount in your monthly record.
This expense record should give you a good idea where your money is being directed, which is a good start. Here comes the hard part: look at your record with a critical eye. By looking at your spending patterns you will get a good idea of which expenses you can’t change. However, you’ll also see areas where you could reduce spending. For example, do you really need to pick up a jumbo-size hot blueberry coffee each morning on the way to work? That "small" expense every day quickly adds up over time, affecting your savings, not to mention your waistline.
Creating Your Budget
After you’ve added it up, take a blank copy of your expense record and label it "budget." Instead of recording actual expenses, though, list what you would prefer to spend in each category. Start by listing constant expenses (rent, mortgage, car payments, etc.) that don’t change from month to month. Then, use the information you’ve gathered on your more impulsive purchases to set reasonable limits. Some categories, such as food and clothing, are necessary, but could stand to be trimmed; and eating in a few more evenings rather than dining out. Others, such as entertainment expenses (software, movies, music downloads) are areas where you’ll have greater flexibility—as long as you and your spouse agree to stick to the budget.
Once it’s clear how much money is being spent, you’re ready to take the next step in the process, establishing goals for saving money. This is where budgeting can really pay strong dividends in the form of better vacations, greater security for those rainy days, and even the purchase of the dream home you’ve always wanted. It can also help avoid arguments over money with your spouse—the number one cause of marital stress. Who would have thought a simple thing like a budget could have so many benefits?
Tim Kirchner is vice president of MetLife Home Loans. Kirchner has more than 25 years experience in the home mortgage industry. For additional strategies on saving, visit www.metlifebank.com, and select the tab on "Life Advice."