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Q&A: Top Tips for Creating a Budget

ParentMap and Verity Credit Union bring you helpful family financial planning and money management information. This month: Family Budgeting 101.

Steps to creating a budgetQ: What are some great tricks for sticking to a budget? Heck, I just need help making a budget — where and how should I start?

A: Most people believe that if they put together a “budget” they will suddenly have power over their finances, all the bills will be paid on time and they will finally be able to take that long-overdue vacation to Hawaii.

Indeed, having a well-organized budget is important, but all too often people simply can’t figure out how to create one, and, more importantly, they can’t stick with the budget once they’ve put it together.

Here’s the truth: Creating a budget is the last step in a logical, systematic process of personal finances discovery. The trick in putting together a budget is to think of yourself as a super-sleuth detective. You need to start by examining your personal values and motivations, and you also need to take an objective look at your financial resources and habits. Only then can you sit down and create a realistic budget.

Here are four “pre-budget” strategies that I’ve been recommending to families for years. In reality, they are incredibly simple principles, but they require a good deal of detective work and, most importantly, a sense of humor. Here we go:

1)    Define the word “enough” in your life. Only you can decide what “enough” for you is. Unfortunately, most people never sit down and think about their relationship to money, material things or their lifestyle. For most people, life is just one serial shopping expedition with a huge credit card bill waiting at the end.

It’s essential that you examine what makes you tick and what “Joneses” you’re trying to keep up with. We are living in an incredibly materialistic society and it has become far too easy to spend money we don’t have for “stuff” we don’t need.

2)    Track your spending — every single penny. Then create a spending plan. Yes, you read that right: If you want to put together an effective budget, you have to start by tracking every single penny that enters and leaves your life. My mom grew up during the Great Depression, and she taught me that you can’t make good decisions about money without knowing how much you’re earning and how much (exactly how much) you’re spending. I’m willing to bet most of you can’t tell me how much you spent on food last month. For the record, food is: groceries, restaurants, snacks, sodas, candy, etc. How about utilities? How about transportation? How about “celebrations” (birthdays, holidays, picnics)? Do you really know how much you’re spending on your lifestyle?

So how should you begin? First, pick one evening a week to sit down at your dinner table or in your home office and devote about an hour to evaluating your spending. Make a sheet (or use one you find online) on which you can list your income and weekly expenses. Tracking the big stuff such as your rent/mortgage and utilities is fairly easy. You can look at your statements from the last couple of months to get those numbers. Then start categorizing your spending such as food, transportation, clothes, entertainment, etc. and pick one or two categories that you want to examine more closely.

Then restrict yourself to paying cash in those categories. Food is the best place to start because it’s a category one has the most control over. I recommend putting $50 per week per person in your household into an envelope each week and paying cash at the store. Keep all your receipts in the envelope. Also, write down any of the small purchases on the envelope. At the end of the week, look over your numbers. You’re going to find out very quickly exactly how much you’re spending on food. If you run out of money before the end of the week, don’t worry. It merely shows that you’re paying attention and that you need to make adjustments.

Your next step should be to use this same tracking technique on all the categories in your spending plan. After two months you will have accumulated a huge amount of useful information about what you spend your money on and what you truly value.

3)    Examine your debit and credit card habits. One of my biggest concerns for families today is their use of debit and credit cards. In fact, money has become so abstract that people no longer pay attention to their spending habits. As I mentioned above, one way to get real with your finances is to go back to paying cash for a couple of months. I guarantee you’ll be far more frugal at the checkout counter knowing that you’re parting with cash rather than swiping your debit card!

During this discovery process, you should sit down and take a look at your credit cards, their various interest rates, and your spending habits. Quite often, families “hide” spending by using a credit card. That big birthday party you helped pay for last weekend disappears into a minimum payment on your credit card rather than going into a spending plan category that you can track!

4)    Pay yourself first! Most people pay all their bills first and, if they’re lucky, they put a little money away for a rainy day. This is exactly the opposite of what you should do. The old wisdom is that you should pay yourself 10% of your net income and then live on 90%. This is a good plan; however, most families today struggle to break even each month. Nevertheless, it’s imperative that you have a plan to create an emergency fund in case something bad happens (and you know “something” will always happen).

Resolve to pay yourself 1% of your income by depositing it into a savings account you don’t touch. This will force you to start living on 99% of your income. If you’re tracking your spending, you’ll soon find that 1% somewhere in your spending plan! The goal is to accumulate six months of your salary so you can weather a rainy day.

Once you have completed the steps above and you have a couple of months of financial data, you’ll then be ready to put together a forma “budget.” Just remember that this money journey is an ongoing process that you’ll get better at the longer you do it.

Have questions about family finances? Email them to and Verity will address them in upcoming columns.

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