Are you parents that struggle month to month to stick to a budget? Are you stressed about being able to pay the bills even though your income is good? Are you wondering if there is a better way? There is and it starts with a philosophy. Here are the five steps to that philosophy of budgeting for young families.
Budget Step 1: Understand What You Need to Live On
Calculate how much money you need to live on. Your necessities include your utilities, rent or mortgage payment, groceries and gas for your car. For us it also includes diapers for the one-year-old and my wife’s new lighting equipment for her videography business. I think you get the picture. Write down how much you need by looking over your past expenses. Then add these up and see where you are. The total number may be smaller than you think, which will give you a more flexible budget. (For more, see: 10 Common Habits That Can Increase Wealth.)
Budget Step 2: Treat Savings As a Needed Expense
I encourage you to treat savings as a needed expense in your budget. My wife and I use this thinking and it has helped us make sure we are building up our emergency fund each month. I recommend 10% of your income to start with. And if you can’t do 10% then try 5%. I know it’s hard since you are wondering how you will have a social life, but think about what happens if your car breaks down or your toddler breaks your phone. By having cash on hand for the unexpected, you are able to still afford the necessities of life.
Budget Step 3: Don’t Forecast Income
If money is not in your account, you don’t have it, so don’t plan on using what you don’t have. It just doesn’t make sense. Something that I have learned recently from YNAB (You Need a Budget) software is that you should be using money that is aged. In other words, using money that you already have. This can be hard to do when starting out, as you may have to cut back on your fun expenses before your money is aged. But once it has, your stress drops significantly because you can be confident you have money for the next month's expenses already. Saving consistently enough to build up a month’s worth of living expenses allows you to afford things like a new water heater without blocking your cash flow. (For more, see: How to Create an Effective Budget.)
Budget Step 4: Don’t Fool Yourself
Everyone knows that you may need to save for some house repairs, pay for a children’s museum membership or renew your Amazon subscription. Why not budget for these a little bit each month instead of trying to figure out how to pay for them when they surprisingly come up. This part takes a little bit of work but setting aside $20 bucks a month for Christmas presents starting in January prepares you for Christmas in December. Understanding your annual expenses allows you to do something about them and be proactive when it comes to planning for them.
Budget Step 5: Your Budget is Liquid Not Frozen
We all know that every month presents different needs financially. For me, one month we may eat out more and buy fewer groceries or my daughters may need new clothes. Because different months present different scenarios, we need to be adaptable within our budget to afford it. Having a flexible budget means finding an area in your budget where you may have wiggle room in one month but are maxed out the next. It is not saying we can splurge a little more. You just end up hurting yourself more if you do that.
In the end, having a working budget can be done. You just have to be proactive about it and it may take some sacrifice in the beginning. But it is well worth it. You will feel less stressed and more comfortable with what you are spending your money on. There are many great tools available for budgeting but my favorite is YNAB. (For more from this author, see: Roth or Traditional IRA: Which Is Better for You?)