11 Ways to Put Your Family on a Budget for the New Year
Related: 10 Ways to Save $100 or More in 10 Minutes or Less
The first task is identifying how much money comes in and how much goes out. Record all earnings -- net of taxes, 401(k) contributions, and health insurance premiums -- on a monthly basis. Then list expenses: fixed (necessary and the same every month), variable (necessary but different every month), and wants (dispensable extras). Divide them into categories, such as utilities, housing payments, food, healthcare, and personal, and note the associated costs. If you don't know exact figures, start with estimates. Rachel Meeks, a blogger at Small Notebook, suggests thinking in terms of "planned amounts" (lowball predictions of income and rounded-up predictions of expenses). Keep track of actual spending, adjust the estimates, and soon a steady monthly budget will emerge.
Henry David Thoreau's famous exhortation from "Walden" about routing out life’s complications applies to budget planning. Some advisors suggest forgoing spreadsheets in favor of old-fashioned pen and paper. Others favor basic budgeting software, available free from sites such as Mint. The tool is not important; the point is to use whatever mechanism best enables your family to address household finances directly and clearly on a regular basis. Cutting up extra credit cards is another way to simplify. Doing so eliminates the danger of running up debt (and paying exorbitant interest fees) and means fewer accounts to manage.
Build up savings or pay off debt first? The dilemma plagues many people and engenders debate among financial advisors. There are plenty of reasons to wipe out debt as soon as possible, including stress relief, a better credit score, and improved financial security. And because interest rates paid on debt are higher than those earned on savings, it pays to eliminate debt first. The counterarguments: An emergency fund with three to six months' income should be the top priority, eclipsing debt payoff, at least in the near term. Then, too, additional income might be coming your way -- an inheritance, say, or a raise, or anything that means more money to work with. There's no right answer here. Assess the overall situation realistically and strive for balance.
What do you want out of your money? A financial literacy program at Duke University identifies different types of goals: long term (more than five years), midterm (one to three years), and short term (within the year). The mnemonic "SMART" indicates that each goal should be specific, measurable, achievable, relevant, and time framed. Say you want to take the family to Disneyland in two years. This goal is specific and measurable. At an estimated cost of $4,000, Disney's vacation budget estimator figures the target is achievable by saving $174 a month for the next 22 months. It's relevant if children will be old enough to enjoy the experience two years hence, the set time frame. Download the free SMART worksheet from Duke to get started.
Both common sense and research suggest that paying cash makes people more conscious of every dollar spent, which in turn leads to less spending. Some thrifty consumers use envelopes of cash allocated to particular expense categories. Once an envelope is empty, no more purchases of that type until the following month.
All adult members of the household should meet on a regular basis -- biweekly or once a month -- to assess the state of the budget. Review expenses, both planned and actual, and check bank and credit account transactions for fraud and excessive spending. Make sure all bills are paid before their due dates; paying all at one time (if possible) minimizes the chance that something will be overlooked. If billing cycles are helter-skelter, ask providers about changing the schedule so that monthly bills come due at once.
Give older children and teens a head start on money management by involving them in budget meetings. They will see adults modeling smart financial behavior and quickly understand the "time equals money" equation. Point out, for instance, that earning $10 an hour babysitting means 12 hours of work to earn a $120 bicycle. They'll also see that earnings must cover necessities, obligations, and savings before "wants" can be satisfied.
Having a specific long-term goal in mind, be it a vacation or major purchase, can help motivate planning and budgeting. Big dreams also put small purchases into perspective. Even a few dollars a day adds up quickly and keeps moving you farther from that dream of buying a car or house. Get into the habit of asking yourself something like, "Do I want a new shirt today or a trip to Spain next summer?" This can help you identify priorities and budget accordingly.
Finally, and perhaps most importantly, live within your family's means. That requires more money coming in than going out; the budgeting exercise is all about finding and maintaining a stable financial balance. Ignore the Joneses and cut back on luxuries, eschew debt, and forgo useless stuff -- a resolution for the family to live by in the new year.