Deficit spending is a no-no
Too bad your household can’t run the way the federal government does. If it could, you’d be trillions of dollars in debt, feeling pretty much OK about it and planning to deal with your creditors . . . maybe next century. Unlike the government, you’re not permitted to engage indefinitely in deficit spending.
A budget isn’t complicated
If your outgo exceeds your income, you need to put yourself on a budget, pay all your outstanding bills and try, really try to reserve some money as savings. A budget, no matter how big or small, is really nothing more complicated than a list of how much money you have at the beginning of each month and how much of it you have left at the end. Even if your finances look good, without a budget, you can get caught in a debt spiral before you know it.
Video: How to create a workable budget
Make a list of income vs. outgo
To create your monthly budget, start here. Figure in everything you can think of. Nothing is too small to be included.
Income and deductions
- Monthly gross income
- Wages
- Alimony
- Child support
- Pensions
- Social security benefits
- Income deductions
- Taxes (federal income tax, state income tax, property tax, Social Security tax)
- Savings plans (401(k) and the like)
- Employment benefits (medical, dental and vision plans, life insurance)
Subtract deductions from gross income to get your total net income:
Expenses
- Rent or mortgage
- Home insurance
- Utilities
- Transportation
- Car payment, bus tickets, taxi fare
- Car upkeep (insurance, gas, license fees, maintenance, parking fees)
- Food (groceries, restaurants)
- Clothing (cleaning and new purchases)
- Entertainment (books, magazines, Internet, movies, vacations)
- Debt (credit cards, all other loans)
- Other (child care, hobbies)
Total your expenses.
Don’t spend more than you make
Now subtract total expenses from total net income. What is the amount you have remaining? If you have nothing – or, worse yet, if you have less than nothing, which means you’re in debt – it’s time to start denying yourself the things you want but don’t need and can’t afford. There are many ways to cut costs.
Figure out your income-to-debt ratio
A good number to know is your income-to-debt ratio. To find it, divide total debt by total income to get a percentage. For example, if your income is $50,000 and your debts total $25,000, your income-to-debt ratio is 50%. Experts say that’s too high and means you’d better start tightening your belt right now. Aim for something like 40% or even lower, which allows you to save for the future and handle emergencies.
Make some sacrifices
If the purpose of budgeting is to get your family out of debt, you’ll probably have to make some sacrifices, at least at the beginning. You’ll have to be tough and just say no to new spending, especially if you’re tempted to use a credit card. Remember, the money you spend when using a credit card is not yours and doesn’t become yours until you pay off the balance and interest in full.
Video: How to Organize Your Personal Finances
But keep it real
Just like a fad diet that sounds great but is impossible to stick with long enough to see results, a budget that doesn’t reflect the reality of your particular situation is likely to fail. Depriving yourself of everything you enjoy will make you ornery, so allocate just a little bit of cash for small indulgences.
Force yourself to save
Business people know that a company won’t survive long-term if there is never enough profit to put back into it after the bills are paid. A plan that forces you to regularly set aside some money is key to your future financial wellbeing. Have your employer direct-deposit some portion of your pay and try hard to never tap into that fund.
Involve the kids
Now that you’re on your way to creating and maintaining a budget, bring your children into the process. As soon as they start making money of their own, they’ll benefit greatly from understanding what to buy and what not to buy, how dangerous the use of credit cards can be and the importance of saving for college and other big purchases.