Kill Your Debt

Home truths about debt and managing it

For singles, creating a budget is relatively easy. They tend to have a good handle on how much money they have coming in, and when tracking expenses, they only have their own to think about. But creating a family budget is a whole new ball game.

Most families have multiple sources of income. And when there are multiple spenders, that makes things much more confusing. This is one of the main reasons that families lack a formal budget. But having a budget and sticking to it can greatly improve a family’s financial outlook.

Making a family budget may be tricky, but it can be done. Here’s how.

1. Take inventory of all income. If a certain source of income fluctuates from month to month, use the lowest amount or average it out.
2. Keep track of all expenses for a month or so. Keep all of your receipts, and ask all family members to turn theirs in to you each day.
3. Add up your monthly expenses. Be sure to include bills, debt payments, groceries, and everyday expenses such as lunch money and transportation costs.
4. Get the family together and discuss ways you can trim the budget. Getting input from other family members will help you determine which expenses are necessary and which ones could be cut down or eliminated. Maybe you or your spouse could start taking lunch to work instead of eating out, or maybe the kids can drop an extracurricular activity.
5. In addition to individual expenses, discuss how you can cut down on the electric bill, groceries and other necessary family expenses. Consider such things as carpooling or taking public transportation, buying more generic foods and adjusting the thermostat.
6. Estimate how much you can save on regular expenses, and cut the completely unnecessary items out of the budget. Then refigure it and see where you stand.
7. If you end up with a surplus, allocate a portion of it to savings. If you’re in the red, go back and rework the budget until you have more income than expenses.

Being Realistic
One reason that family budgets often fail is because they’re just not realistic. It’s great to cut down on expenses, but sometimes we tend to go too far. For example, cutting entertainment out of the budget completely might look good on paper, but we all need a little diversion every now and then.

Instead of cutting such things out of the budget completely, consider finding ways to lower the cost. Going back to the entertainment example, maybe you’ve been going to dinner and a movie as a family twice a month. But eating in and renting a new release would be much cheaper, and you would still get to spend quality time together.

Individual expenses can also be tricky. This can be resolved by allocating a certain amount for each family member to spend each week. If someone spends his entire amount before the week is up, reevaluate his expenses and adjust if necessary.

Creating a family budget can help keep spending under control, leaving more money to pay down debts and save for future goals. But in order to succeed, close monitoring is essential. Your efforts will be rewarded, however, with less financial stress and more money in the long run.

There are several complicated methods of keeping your casual spending in check, but by far the simplest is using the common old envelope.

This is more appropriate for people who get paid fortnightly or monthly than those who are paid weekly. You will see why in a moment. Also, this method lends itself very well to implementing the Emergency Fund discipline I wrote here.

Firstly, a quick definition of the problem. Eftpos, debit and credit cards. They are the baine of the novice budgeter, and can even get experienced budgeters into trouble. It is simply too easy to lose track of how much you are spending on “casual” expenses. A coffee there, a sandwhich there. It adds up quickly, and by the end of your pay period you will usually run out.

Any business will tell you that cahflow is king, and even in rought times a business with good cashflow is likely to weather the storms.

It is no different with personal cashflow. If you are paid once a month, you need either three or four envelops. Fortnighly requires just one envelop.

On your payday, you go down to your bank and take our your weekly “casual” spending money.  Although this will be covered in another article, it is essential for things that you need/want like coffees, a movie ticket or the like.  It’s not the big regular stuff, its the minor things that you end up spending money on each week without realizing.

If you need to allow for four weeks, you take four weeks worth out.  When you get home, you put each weeks into a seperate envelop.  Stick them in a draw, don’t touch them until the start of the following week.  The balance of money for the current week you stick in your wallet/purse.  That’s all you have for the week.

What this does is make you think every time you spend money, you see that your money is “disappearing”. Discretionary spending is likely to be less frivolous if you see the impact there and then rather than on your bank statement.  It gives you an obvious target for limiting your spending.

Another thing this simple method does is empower you. I remember teaching this method to someone close to me, and after a few months they felt incredible control over there spending. They really felt a lot less stressed over their money, and actually found they had more money to spend than they used to.

Now, let’s say you are going out in the third week somewhere special, and your weekly allowance does not cover it. Simple. You can put ten or twenty dollars from each of the other weeks into the third weeks envelop. You honestly won’t miss it.  You now have power over your money instead of the other way around.

Copyright © 2009 Karl Rohde

You have one right?

That little nest egg for a rainy day, the “opps” fund when something in life doesn’t go according to plan?

No?

Why not? It’s one of your most important tools to getting your finances back on track. Some people will tell you it’s reducing your credit card debt, or paying off your student loan, and yes, they are all important.

But the emergency fund is what will stop you ever having to put some unexpected expense on credit.

How does it work?  There is no hard and fast rule, and the amount is specific to the individual. But as with many things to do with budgeting, it is about discipline.

So, want to get started?  Here we go then.

1. Set up a low interest, no fee savings account
2. The day before payday, transfer whatever is “left” before you get paid into this savings account

Simple as that, nothing fancy, not tricky formula.  Whatever you have left in your day to day account before your pay goes in goes towards the emergency fund.  Be it a dollar or ten dollars.

Some people go, “but I never have any money left” or “well, it was only a couple of dollars”.

To the first objection, once we get you onto a budget, you will have some left, and you will see why the above approach works and works well.

To the second objection, so? Do you think Rome was built in a day?  A little every payday adds up.

Now, what exactly is the emergency fund for? A holiday?  Pay the kids school fees?  Nope.  Hopefully you will never touch it, ever, but that’s unlikely.

Consider some of these scenarios:

1. your spouse is away on business and is killed, how quickly can you raise the money to get everything sorted before the insurance comes through to help you out
2. you smash your car up, and urgently need money for legal bills or the excess?
3. insert some other unexpected event that usually means most people have to use their credit card/overdraft

It may seem very simplistic, and to a degree it is. But that’s it’s beauty.

One thing though, it doesn’t help if you need the emergency fund in the first few years.  It’s reliant on time to build it up.

But consider this, lets say you get paid weekly, and you have 3-4 dollars at the end of every pay cycle. After five years you will have around $750 to $800 dollars.  Not a lot you say, but it’s money you would have wasted, and certainly not money you would usually miss each week.

However, if you are caught short due to unexpected events, having that extra money is going to help, and it’s not diluted by other savings (which I will be going into in a future post).

So, get started on your next pay before life throws that curve ball and you have to put stuff on your credit card.

Copyright © 2009 Karl Rohde

IF you go to an accountant and ask them to help you do a budget, they are going to be very “matter-of-fact” about it.

If you go to your spouse, parent, teacher, lecturer, or anyone else and say you want to do a budget, they are also likely to be very “matter-of-fact” about it.

The problem with all these people is they are either in denial, or have never actually done a personal budget before.

I learnt some time ago that dealing with your personal finances is very, well, personal. Trying to work with someone on their personal budget is going to get emotional. It can’t be helped.

Not being a pschycologist I am really unsure as to the specifics about why budgeting becomes so emotional, but I certainly know it does.  Having helped several people with budgets, I can guarantee you will encounter a range of emotions and responses some of which will be in the following list:

• anger
• fear
• despair
• denial
• depression
• hysteria
• resignation
• frustration

I recall working on a budget for some one very close to me. She broke down in tears, and actually started sobbing so bad it took a good 10-15 minutes for her to get herself together.

Another person I was trying to help walked out on me for no apparant reason and never wanted to discuss his budgeting again.

Budgeting is a very life changing experience if done correctly, and as with all life changing experiences, emotions are involved.

If you are serious about getting your finances sorted, you will need to be prepared to feel very vulnerable and have buttons pressed that you did not expect to have pressed.

I am looking forward to this, sharing these ideas journey, and I hope you will follow me on it as I once again go through the process myself.  Get your box of tissues ready, you are going to need them!