Since making a family budget is about as much fun as having a root canal, people routinely avoid this exercise. Perhaps they are afraid that a money discussion will cause tension. Or maybe they worry that making a budget will reveal just how out of control the family finances are.
Whatever the reasons for avoiding budgeting, they need to be shoved aside. Budgeting may not be fun, but neither is living paycheck to paycheck. In this case, knowledge really is power. Knowing what is causing financial stress is the first step in correcting the problem. One logical way to approach this task is by calculating your current financial situation.
First create a budget based on estimated calculations. Next, track your income and spending every week for a month. The Internet is full of budget-planning software and pencil-and-paper worksheets. After you have actual numbers, the places to cut should be obvious.
Calculate Your Income
- Take-home pay from employment
- Payments from legal settlements
- Royalty payments
- Income from part-time jobs
- Side income
Calculate the Necessities
Necessities should total about 50 percent of your income. If your total percentage is more than a point or two higher, necessities can be trimmed.
Do you doubt that you can cut the cost of necessities? You can. For example, you can sell that car with the high payment and buy a “beater” for a few thousand dollars. Even if you take a loss on the car, you can eliminate a hefty payment.
Necessities only include the following five items:
- Shelter: This includes your mortgage, home insurance and property taxes.
- Utilities, such as water and power.
- Groceries: Eating out is more of an entertainment expense than a food expense. Therefore, it belongs in the lifestyle category. [See: Grocery Shopping On a Budget]
- Transportation: This includes car payments, fuel, maintenance, registration and insurance.
- Health care, including health insurance.
Calculate Financial Priorities
Financial priorities are those items that create financial independence. This category should total about 20 percent of your income.
Families often cut spending in this category first. However, cutting stability to compensate for overspending is not smart. Financial priorities should never be cut.
The following items are included in your financial priorities:
Calculate Lifestyle Expenditures
Lifestyle expenditures should comprise the remaining 30 percent of your total income. Naturally, this is the area that is easiest to cut. Lifestyle expenditures include the following:
- Internet connectivity
- Home telephones and cell phones
- Cable or satellite television
- Movie club memberships
- Restaurants and other entertainment
- Charitable giving
- Gift giving
- Pet expenses
- Personal grooming
First, create a projected budget. Recognize that your first budget will be a draft that requires tracking and updating weekly for a month or two. As you note actual expenditures, priorities may have to change.
Your final budget should adjust current spending to fall within your income range as well as within the suggested percentages. Hopefully, you will find that living within your means is simply a matter of applied knowledge. Living within a budget adds some sanity to spending, and it also ensures that you will have solid financial stability for years to come.
Jayson Mullin is a tax expert at Top Tax Defenders, a tax resolution company that provides many services including removing IRS tax levies.