Make a Budget #4

Jan 13, 2012 by

As we start 2012, I’m focusing several posts on Budgeting. This is post no. 6 in my Budget series, and the fourth post covering my “6 Steps to Create a Great Family Budget.” The last post covered Step 4; this post adds Step 5: “Discuss, negotiate, and compromise to balance.” Click the Budget Category link on this blog’s homepage to see the entire Budget series.

My “Make a Budget” series walks you through the 6 Steps that I think will work well to help you make a great budget. What makes a budget great? It’s not how well you forecast your fortunes or misfortunes during the upcoming year. The measure of a budget’s value is how well it helps you make better money decisions. And that’s the sort of budget my 6 Steps are designed to make.

There’s Not Enough Money. Now What?

If you’ve stuck with me through the Make a Budget #1, #2, and #3 posts, first, you deserve a medal, and second, you’ve got in front of you:

  • Your family’s near, medium, and long term goals (Step 1)
  • A spreadsheet or sheet of very messy paper where you’ve recorded your household take-home-pay and expenses, by month for 2012 (Step 2 and Step 3)
  • The very important notes documenting how you arrived at these numbers

Good! Except for one thing: The bottom line, Household Net Money, is a big fat negative number, right? Your budget is out of balance: Expenses are more than take home pay. Not to worry.

Balancing Act

The remedy for an unbalanced budget is simple, but rarely easy:

  1. Boost your income,
  2. cut your planned spending, or
  3. postpone some of your goals.

If it’s very important to you to take a Rocky Mountain vacation in two years, then you may decide to take a second, part-time job to pay or it. Or perhaps you decide to put off replacing the car for another year. Or maybe you decide it’s more important to put $100/month into a college fund than spend that money on dining out each month. For our 2012 budget, one choice we made was to eat out less so we could save a bit more. In the end, your family members must settle, based on your family’s values and priorities, on a budget that’s:

  1. Balanced, and
  2. paints a picture of how you want to manage your money to meet your goals.

If you’re fortunate enough to end up with a balanced budget the first time through this exercise, great! You’ve got more money to save.

Priorities

In our house we talk about priorities and goals at our annual Summit Meeting, which then leads into our budget for the year. As your family discusses its priorities and works toward a balanced budget plan, here are some ideas you might keep in mind:

  • If you have high-interest debt or an emergency savings fund with too little cash in it, dedicate a big chunk of your extra cash—meaning what’s left over after you pay your Necessary expenses and a frugal portion of your Optional expenses—to paying down high-interest debt and building your emergency savings. Typically it’s best to delay saving money for vacations, college, new furniture, or other large, Optional expenses until your high-interest debts are paid off and you have the emergency savings you need.
  • Think about putting your family into “debt pay-off battle stations mode” if you have high-interest debts. This means trying to cut all of your expenses, with personal sacrifices from every family member ‘for the good of the team,’ and perhaps even getting second, part-time jobs. Direct every penny you can to high-interest debt pay-off (maybe a Debt Management Plan makes sense for you) and building an emergency savings fund if you don’t have one. This approach is challenging, no doubt. See if this helps: Spend 15 minutes talking about and envisioning how your lives would be different and how you’d feel if you had no high-interest debt.
  • After you’ve repaid your high-interest debt and built an emergency savings fund, you’ll have money to start saving for other goals. Prioritizing these goals can be dicey—family members won’t always agree. Is it more important to put $300/month into an IRA or save $300/month to pay for a nice vacation next summer? Should the family save to buy a camping trailer if that means cutting back for a while on contributions to a college fund? There are no easy, one-size-fits-all answers to these and hundreds of other questions. Communicate, negotiate, and compromise. But in the end, balance.

How’s your budget coming along?

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