When Benjamin Franklin said, "A penny saved is a penny earned," he was being shortsighted. These days, a penny saved is a lazy penny. A well-designed family budget puts your money to work where it makes the most sense. You can set up a basic budget on paper in an evening. The real trick is fleshing it out and making it work in the real world — and a few tricks can help you work your budget like you really mean it.
The word “budget” probably has about as many fans as the word “diet.” Both carry overtones of sacrifice — something that's good for you but doesn't feel very good. But a budget isn't about depriving yourself. It's about providing for yourself and your family. When you create a budget, you'll see exactly how much money is coming in and how it's managing to slip through your fingers. More importantly, a budget helps you make informed decisions about how and where you spend your money.
How to Budget
Set aside an afternoon or evening to sit down with your partner. Gather up your pay stubs, bank statements and all of your bills. Sort your bills into fixed expenses — the ones that are the same each month — and variable expenses. Add up all of your income sources to come up with your total monthly income. Subtract your expenses from the total. Don't forget the costs, such as transportation and dry cleaning, that are necessary for you to work effectively. What's left is discretionary income — money that you can spend or save as you choose. Divide that up among savings, long-term investments, entertainment and purchases.
Take advantage of tools your bank provides to make savings easier. Use direct deposit if your employer offers it and set up an automatic transfer from your checking account to your savings account each paycheck. If you can, have three accounts — your checking account, for immediate expenses; a savings account for recurring expenses that aren't monthly; and a second savings account for emergencies. Build your emergency account to cover three months’ worth of expenses. Once you hit that, start building long-term savings in an account, such as a money market account, that pays higher interest rates.
Set up budget plans with your utility companies so that you pay the same amount each month, regardless of the actual bill. You'll avoid budget-busting seasonal spikes in heating or cooling bills.
Use online bill-paying with automatic payments to avoid late payments, which can add up to a hefty amount over the course of a year.
Decide how much you can spend on entertainment, impulse purchases and everyday expenses. Only leave that much in your everyday spending account. Opt out of overdraft protection for your debit card so you don't accidentally overspend.
If your bank offers a round-up program for savings, opt in. Every time you make a purchase with your debit card, your bank will round it up to the next dollar and deposit the difference into your savings account. It's the high-tech equivalent of the penny jar, without the work of rolling coins and taking them to the bank.
- University of Florida Extension: Investing for Fun, Family and Retirement
- Ohio State University: Manage Your Money - Developing Your Budget
- University of California: Bill-Paying and Record-Keeping
- "Beyond Budgeting Tips: How to Use Flexible Budgeting of Money to Stay on a Family Budgeting Plan"; Ramon Glyde; 2010
- Jupiterimages/Comstock/Getty Images