Budget your Finances carefully.

“Planning a family budget means predicting future incomes and planning future expenses accordingly.”

The main objective of developing a family budget is to have more control on our expenses, taking care that the difference between incomes and expenditures, is maximized.

The old way of handling money is to think about your money in terms of your account balances. Money goes in, it’s put into some type of account, and it goes out. This system is old, inadequate, and inefficient. Put simply, it’s a waste of time.

Under the old method, spending decisions are made based on how much money is in an account, creating a false reality which ignores large, upcoming obligations. Because these larger obligations are rarely planned for, unnecessary stress arises. It’s not that we don’t want to set aside money for that large tuition bill, Christmas, or our semi-annual car insurance premium, we’re just pressed to use our funds earlier for something else. The apparent urgency and the designation of priorities is a tricky balance.

In with the New

As with all new things, there is a tendency to resist a new money management system. While we may not necessarily like how things are, we certainly don’t want to bother with something new. New inherently means change and the possibility of feeling lost. New has a touch of the unknown, and we’re scared of that.

Rule One:

As we discussed earlier, the old method had your money organized among your bank accounts, and maybe a change jar. That won’t suffice any longer! You will begin to proactively plan what your money will be doing before it leaves your hands. In the end, you’ll see that your money will work harder for you every chance it gets.

Assigning every dollar a job

A household where the dollars’ roles are not properly defined is destined to a dim fate. This is just a fancy way of saying that you need a budget which will assign each of your dollars to a specific and predetermined purpose.

Up to this point, you may have been operating under a “decide as you go” strategy. As chances to purchase or crisis situations came up, you look at your current dollars and allocate them to the most urgent or appealing jobs. You’re already giving your dollars jobs, you’re just doing it on the fly, and not in a methodical, effective, stress-reducing manner.

Rule One necessitates foresight and planning, but the mechanics of this Rule are simple. As money comes in, it becomes Available. These Available dollars then wait for their assignment, and it’s up to you to give it to them. You might assign some to pay for groceries, the rent, or gasoline for the car. Others may be assigned to sit and wait for an emergency to happen (your emergency fund). Some may be given the job to pay for some entertainment. The important part about this step is that no dollar is left unassigned–even (and most importantly) your “fun money!”

As you begin to give every single one of your dollars a purpose, you’ll experience some wonderful, wonderful things:
1. Acknowledgement of a scarcity of resources.
2. The wonders of two-way communication (about money!) with your spouse.
3. The advantage of living within your means.
4. Contentment.

Rule Two:

Rule Two is simply to save for a rainy day.

Amusement

If you’re like most people, when asked to assign a metaphor to your financial life, you’d say that it’s something akin to the scariest roller coaster at an amusement park. These peaks of joy (paycheck!) and valleys of despair (bill!), with a few loops and corkscrews throw in for good measure, supposedly just come with the territory of money management.

The essence of Rule Two is to plan ahead for probable large expenses of both known and unknown amounts. We call these events Rainy Days.
For example, rainy days with known amounts:
• Car insurance
• Life insurance
• Property taxes
• Vehicle registration
And rainy days without known amounts (but you know they’re coming nonetheless):
• Car repairs
• Home repairs
• Car replacement
• Medical bills

By no means is this list exhaustive–yours will probably be quite a bit longer. Handling large expenses in the known column is straightforward. If your car insurance premium is due every six months, and it’s $600, then you would budget (during Rule One’s Budget Meeting) $100 to the Car Insurance category every month. At the end of the six months, the bill would come and you’d have the money available–cash crunch crisis averted.

Handling large expenses of an unknown amount takes a bit more foresight, but it’s also fairly straightforward. These are expenses that you know will come up but you can’t anticipate exactly the timing or amount. This is where you guess. When you’re just getting started, a guess is the best you can do, so don’t be bothered by that. If you guess that you spend $1,200 per year on car repairs, then budget $100 per month into the Car Repairs category. Over time you’ll begin to see trends from actual spending. These trends will help you be uncannily accurate when it comes to estimating the unknown.

When all pistons are firing, your checking account will start to look as healthy as it ever has. Your Car Insurance, Life Insurance, Car Repairs, and Medical Bills categories will be flush with cash. Considering the fact that you’ll be spending last month’s income (more on that when we talk about Rule Four!) during the current month, it won’t be unusual to have several thousand dollars in your checking account at any given moment.

We will continue with Part 2 in the next installment.