So I might not win Mother of the Year, and I may not be the world’s biggest blogger, but one thing I do know how to do is set a family budget.
For starters, a family budget is a living breathing thing. It needs to be set, worked with, reviewed, updated, reviewed again … and so forth. Yes, strict accounting principles would say you don’t change a budget – if you can’t meet it, you failed and you need to examine why. And whilst there is a very strong logic behind that rule, this is a family budget, and family needs change.
I have outlined a number of steps below to help you along your budgeting journey.
Before you get started, there are a few preliminary steps.
Step One – get rid of the blame
The first rule is there is no self-blame. Please don’t sit there and blame yourself, or anybody else. Right now you are taking positive steps to move forward, and to learn from whatever has happened.
Step Two – get your partner involved
If you have a significant other, and you have joint finances, you need to do this together and to be in agreement that you want to save money. Otherwise, this is probably not going to work. If you can’t get agreement – perhaps you need to look at separate bank accounts (and split the expenses between you) so at least you can implement a budget in relation to some of the household income.
Step Three – work out where you are at now
There are a number of tools you can use to work out where you are at with your family budget (e.g. Xero). For now, I’m going to keep it simple, you can just download your bank transactions directly from your online bank account. Most banks allow you to download transactions in an Excel Spreadsheet. I recommend you download 12 months worth of transactions to pick up any seasonal spending. Do this for each of your main accounts.
If you are doing this in a Spreadsheet, adopt a colour code for income, and for types of expenses. I’d suggest a colour for each of:
- Your income
- Your partner’s income (if applicable)
- Joint income
- Grocery expenses
- Eating/drinking out
- Other entertainment
- School Costs
- Clubs and sports costs
- Petrol and motor vehicle costs
- House maintenance
- Car payments
- Other debt payments
- Any other main spending item
You can then sum up each of these expenses, and work out an average monthly spend.
I have just done this with our bank statements. I’ve concentrated on our grocery and eating out budgets. I worked out our average spend on groceries over the past 12 months was $1450 per month. We also spent another $900 per month on eating out, takeaways and alcohol. In addition to this, hubby and I ALSO pay ourselves pocket money. This pocket money goes across to our own accounts so that we can buy lunches, or coffees, without having to feel guilty. The pocket money is another $300 per month.
I’ll put this in USD so you can compare, that is an average of USD981 per month on groceries and ANOTHER USD610 per month on eating out, as well as USD200 per month in pocket money for our own little treats on the side. A little high I think!
To get this family budget under control
I need to set a budget for what I want to spend on each of these expense categories.
The amount I set is going to come down to motivation. If we lost a salary and needed to cut costs, I would be slashing every one of these expense items. My motivation right now is to live a simpler life and to save money for things that are more important to us. The easiest way to do this is to address the large white elephant in our budget – the huge amount we spend every month on eating out and drinking nice wine. So I am going to focus on our grocery budget, and our eating out budget.
We have set a goal to reduce our grocery budget to $1,000 per month.
We have also set a goal to cut our “eating out” budget in half – we have set the budget for eating out at $450 per month.
Like I said, a budget is a living, breathing thing. It needs to be set and reviewed. This budget is just Phase One. After Christmas, we will review how we are going – and make another cut on the eating out budget.
If you are reviewing your entire family budget, here are a few tips:
- Label your expense types “compulsory” and “discretionary”. Compulsory are those expenses you cannot change – rent, mortgage, rates, insurance, car payment, power, food. Discretionary are those you can change – entertainment, clothing, eating out etc.
- Look first at your discretionary spending – this is the easiest place to find savings.
- Then systematically review your compulsory spending. Shop around for insurance, can you get a better deal elsewhere (remember to check it is a comparable level of cover). If you refinance your debts (see below) can you free up cash? Review what phone plan you are on – could you save money here? Do you really need Sky/Cable TV? Can you collect coupons/vouchers for cheaper gas? Can you save power – hang your clothes out in the sun to dry? If you have a gym membership, could you take up running instead?
- Look at the big spend items. Can you save money on groceries? This is one of the most expensive items in the family budget, a good place to start looking at whether you can cut back. Blogs are a great resource for ideas here!
Work out your asset position
Part of your budgeting practice should be to work out your ‘net worth’. This is particularly important if you have debt you want to get rid of, or even just to give yourself a picture of where you are sitting. It can also be a great way to get your significant other on the same page about saving money.
To work out your “net worth”, you need to do another spreadsheet – this is your ‘balance sheet’. Up the top – put in all your assets. Add them up – these are your total assets.
Beneath, put in all the amounts you owe other people (your liabilities). This will include your mortgage, car payments, credit card debts, store cards etc. Add them up – these are your total liabilities.
At the bottom – take your total liabilities off your total assets. Hopefully, you are left with positive assets!
|Example Family Balance Sheet|
|Car loan 1||$15,000|
|Car loan 2||$5,000|
|Credit Card 1||$6,000|
|Credit Card 2||$3,400|
Advanced tip – think about how much income you want when you retire? Now divide that by 20 – this is a very rough and ready estimate of the amount of income earning assets you will need when you retire to give you that much income. For example, you want to earn $50,000 per year when you retire – divide that by 20 = you need net assets of $1m (in addition to your family home!).
If you need to pay off debt
To pay off debt
First of all, there are two car loans in this family. Look at whether you can sell a car/s, repay the debt, and replace it with a cheaper car. Could you get by with one car?
To pay off debt – look at the lowest debt first and pay this off. Using the above example, this family has three credit cards:
- Credit Card 1 has an amount owing of $6,000 and has minimum monthly payments of $300. Credit card 2 has an amount owing of $3,400, and minimum monthly payments of $170. The store card has an amount owing of $2,300, and minimum monthly payments of $135.
- The family has done a budget and can save $30 per week (or $120 per month) in addition to making the minimum payments on the cards. They direct all of that extra $120 per month to the card with the lowest balance – the store card. Once the store card has been paid off, the family can take the $120 per month that they were making in additional payments, together with the $135 they were paying in minimum repayments, and apply all of this against the next card. This means they can make extra payments of $255 per month on Credit Card 2, until such time as it is repaid.
- Close each account as you go – do not keep it open “in case you need it”.
If you have multiple credit cards you might also want to look at refinancing options, you need to see your lender about this, but a few points here:
- Is there a bank offering nil or low rate interest on credit card balance transfers? If you transfer your credit card debt to them you could get a 12-month interest-free period. CUT UP AND CLOSE THE OLD CARD.
- Can you refinance the credit cards into a lower interest rate loan? This does not get rid of the debt – it simply moves it with the aim to make it more manageable. CUT UP AND CLOSE THE CREDIT CARDS, do not book up another loan.
- If you are really in trouble, can you refinance against your house? This is absolutely not something I recommend but if you need to – a mortgage should have a lower rate of interest and can be financed over a 20-30 year period to make the debt more manageable. Again – CUT UP AND CLOSE THE CREDIT CARDS.
- If you are going to refinance your debts, particularly if it is a mortgage, you need to be careful about a lending application. Sometimes this can trigger a bank review – which could lead to them calling in your debt. I was aware of banks doing this during the GFC. If you have a friendly banker, you may want to ask them if there are any risks of completing a lending application before you submit it.
Saving for something special
Even if it is $10 per week, put this aside in a separate bank account (I mean a completely separate bank – where you can’t see it when you log into your everyday online banking). It will accumulate slowly over time to be something special.
*Please note this is general information only and is not intended to be specific advice.