Following on from Christmas, which is one of the most expensive times of the year, it’s a good time to think about budgets. Set a basic budget for the next year; including the holidays so you don’t end up in debt and so you can end next year better off than where you are now. Check out our posts on ways to be frugal and stretch your budget, too.
We’ve had a bit of a nightmare this year as far as our bank account goes. We’ve had just about every electrical appliance break down on us beyond repair (thankfully our car was able to be repaired; there were doubts at the time). Repairing and replacing these items was not a happy time for us. But it could have been a whole lot worse if we hadn’t been putting a little money aside each month for these types of emergencies. Although we’ll have to work hard to build our little reserve back up, having that safety net meant that we didn’t have to go into debt and pay off interest.
Have you been talking about a family budget, but aren’t sure where to start? Sometimes it’s good to start with the basics, things like deciding your goals for savings and what you need to include in each budget category. Here are some tips to help you formulate a simple family budget. And include your children, too, so they can understand the process of where money goes and the the responsibilities of adulthood. Teach them good financial habits so they aren’t clueless when they leave the nest.
The first place to start with any budget is with your income. There may be some rough estimating here, especially if you are self-employed, such as I am. But remember it’s better to underestimate income and be realistic; budgets are not the place to dream big and doing so can land you in real financial trouble. Simply take a look at your net income over the last three months and estimate an average monthly income. Or you might have income that changes very little month-to-month; it should therefore be pretty easy to figure out your monthly income.
Phil has a regular income that doesn’t fluctuate, but my income can vary greatly from month to month depending upon the work I can pick up as a virtual assistant, and which projects my clients have coming up. I also have to think realistically how many hours I can put in and still get some sleep. In addition, I know that for each pound I earn, we will lose tax credits so I must save money for that as well as for the immense change in National Insurance that will see my contributions going up by 700%! For example, I’m working more now than a year ago; yet between income and tax credits I actually have less to live off of. And if you have a raise approaching, remember that it may bump you up to the next tax bracket. Always keep things like this in mind.
Your next category should be expenses. It’s good to include enough detail that you have a grasp on things, but splitting your expenses into dozens of little categories will probably only frustrate you. Try to make your categories fairly general such as entertainment, gifts, groceries, home education, insurance, home maintenance, etc. Entertainment, for example, is a more general category than “computer games, movies, cable, and DVDs” listed as separate categories. There will probably be more estimation here than in the income category. This is the area where it’s better to over budget rather than under budget.
As you break down your expenses into meaningful categories and numbers, remember that charitable giving or any giving away of money should be also listed as expenditures.
Recording Your Actual Expenses
Estimation gives way to “real” numbers when you write down your actual expenses during the month. This is the last section of your budget plan. Keep a running tally of your expenses for several months, and then look at where you are. Write everything down; a budget is useless if you don’t know where your money is really going. After a month or two, revisit your budgets and see how you are doing. Make adjustments (to the budget or your mind set) as necessary and repeat.
Some Basic Principles
While budgeting, there are some principles that are considered basic., such as:
Distinguish between your wants and needs. This can be difficult for some people, but it’s vital in order for a budget to function properly. Be conscious of convincing yourself that a want is a need when it isn’t – you may just be trying to find an excuse to buy the item. Real needs are things like necessary clothes, healthy food, and shelter. Things such as designer clothes, gourmet and junk food, and a large home with extra space are merely things you would like to have, but that you can live without.
Expenses should never exceed income. You may find yourself surprised the first time you draw up a budget and discover that you actually don’t make enough money to cover your expenses. If you find this is your situation, you need to look carefully at your income section and see how you can realistically increase it. More importantly, look just as carefully at your expenses and see where you can trim back or make alternate choices with products; some store brands are the same as brand names. Do you really need a logo on your t-shirt? Can you darn your socks instead of buying new ones right now?