Did you know that each one of us is a CEO? That’s right: the CEO of your family. The essential ingredient to the long-term prosperity of your family is the same as it is for a business: proper cash management.
Just as companies have controls around what they spend their money on, so should we. So ask yourself: Is my family thriving, surviving, or on its way to bankruptcy?
Then ask these questions: Do I have a budget for all my expenditures? Do I proactively account for the unexpected expenses of life or do I react once the damage is already done? Or do I simply ignore my income and expenses, hoping that my next Powerball ticket makes my problems vanish?
Believe it or not, creating a budget and the controls to stick to it are not restricting. They’re liberating. Knowing exactly what your family earns and what it spends gives you the ability to enhance your financial position.
CREATING A BUDGET
Some monthly items are easy, such as the mortgage, car payments, insurance premiums, most utilities, and some other monthly dues. For the variable items such as food, clothing, entertainment, and personal care, try keeping track for a couple months and average out each category.
The most difficult expenses to calculate are the unexpected ones like home maintenance, car repair, vacations, and gifts. For a start, calculate the estimated amount of each that you might spend in a year and keep that number for Step 4 below. Remember, err on the side of caution and round up.
Now that you have a general idea of what you spend, it’s time to build some structure around your cash flow.
Step 1: ACH payments make certain fixed expenses easy to control and track.
Step 2: For any necessity items such as cable, cell phones, utilities, and even gas and groceries, try to pay for them with a credit card. This gets you rewards points and consolidates the bill-paying process.
Step 3: If you’re still writing checks, that’s easy to track as well. (But why are you still writing them?)
Step 4: Break down your total annual periodic expenses into a monthly average. Then escrow that amount much like we do for real estate taxes. Open a savings account dedicated to these expenses and set up a monthly transfer of this average amount into this account. Won’t it be nice when you return from vacation knowing that you have the money to pay for all of your fun?
Step 5: Fun money! Come up with a realistic amount of money each pay period that you can do what you enjoy: shopping, playing sports, lunch with friends, whatever it may be. Set up another checking account, one for you and one for your spouse. Each pay period, transfer that amount of fun money into each account. Rules of the game:
- You can do what you want as long as it’s paid for from your account only, either by cash or debit card.
- No cheating. If you run out of money before payday, then you’re done. No credit cards.
- Since the “fun” spending is now controlled, you can’t “call out” your spouse for what they spend their money on. That’s liberating.
With these five steps, you should have a firm grasp on your family’s monthly expenses, taking into account discretionary spending and those unexpected events.
Does your income exceed your expenses? If it does, congratulations. You have money left over to build an emergency fund, enhance retirement or college savings, or accelerate debt repayment. If not, take an honest look at your budget and start deciding what discretionary expenses can be reduced or eliminated.
Budgeting, like so many things, takes practice. But the more effort you put into budgeting, the sooner this will become a habit that you will love.
I leave you with a quote from Jack Hurley: “Every young man should have a hobby. Learning how to handle money is the best one.”
By Peter Blok
At Agents of Efficiency, we have a number of tools designed to help simplify and streamline the world of a small-business owner. Download our Expense Tracker to help get a better control of your firm’s finances.