Family Finance Series
In the previous installment of the series, we spoke about why we fight with our spouse about money, the need to develop a financial plan to get in control of your money, and we laid out the framework for financial success. Today we will break down that framework and discuss the intricacies of developing a budget, identifying spending habits, controlling and monitoring your progress, and how financial responsibility relates to raising children.
To recap, when speaking with your spouse about money, honest and open communication is vital. Be assertive and specific, but don’t come into the discussion looking for a fight. Focus on your actions and when the time is right, she will own up and take responsibility for her part. The best way to get this started is to share your dreams and goals - Do you want to retire by the time you’re 50? Do you want to own a beach house? Setting common goals will help you to align on the topic of where your money will go, and it will create a more relaxed atmosphere when having these tough discussions.
Step one is to create a budget. This will include all your monthly outgo, and a list of your debts organized from smallest to largest. The easiest way to do so is by going through your financial statements from the previous months and writing down all of your income and outgo. Be sure to account for EVERYTHING, including; groceries and household spending, utilities, car payments, mortgage, insurance, gasoline, car repairs, and other consumer debt (credit cards, medical bills, etc.) You’ll probably notice a lot of room for improvement. Don’t be ashamed of that, it’s a good thing! I’ll explain below.
Probably the hardest part of this exercise is deciding on how much to budget for each expense. Unfortunately, I don’t have a clear cut answer to that question. Your budget will depend on you and your family. As Dave Ramsey says, “Personal Finance is about 80% behavior and 20% head knowledge.” My best advice is to just try a few things and see what works for you. Below is a screenshot of our sample budget, I’ve made it available for download at: (www.goodmengreatdads.com/resources)
Once you have a base budget, run your home like a business. Hold regular budget meetings and make sure you’re not operating in the negative. If you are in the red, we will address that below as well. Before the budget can be approved, all members of the meeting need to agree. This will eliminate future arguments. Don’t think of the budget as restricting your spending, but as your permission to spend. As long as an item is in the budget and agreed to, it’s fair game!
Let me tell you from my own experience, your first budget meeting is going to suck! Focus and embrace the suck, you’re learning! It is important to remember that this budget is fluid. You can change or modify it at any time, as long as everyone agrees. Be proactive and think long term. Be sure to budget for holidays, birthdays, car repairs, etc. Lastly, no matter how tight your budget is, remember to include some spending money. Your plan will not work if you’re too stringent. You’ll feel like you need to cheat and you’ll lose momentum or quit. Going out for an ice cream with your kids or a cheap date night with your spouse is great reward for sticking to your plan and reaching those mini goals. The key to making good decisions is to talk about money before it’s spent.
In addition to the budget meetings, you’ll need to review your debt payoff plan as well. To do so, you’ll need that list of debts, in order smallest to largest, that I mentioned earlier. The method we used to eliminate our debt is to pay the minimums on everything and use any surplus in our monthly budget to pay extra on the next smallest debt. That’s what I recommend because it worked for us. I’ll tell you right from the start that it’s not easy and it requires an enormous amount of patience and sacrifice. Just try to remember that you’re learning how to delay satisfaction and at the same time you’re setting a great example for your kids. You’ll probably notice that you’ll get the first debt knocked out in the first month or two. You’re making progress already! When it’s time to move to the second debt, you’ll take the total payment from the first debt plus any extra in your budget and continue to make minimum payments on everything else. This method allows you to gain momentum and make small wins more regularly than if you were to list them in order by interest or some other method. As you continue to make progress it will become like a game, you’ll try to pay off more debt that the month before and your debt reduction will really start to take off.
Now that you have a base budget and your debts listed, step two is identify spending habits that can be cut back or eliminated. Remember that room for improvement from step one? Check those late night T-bell runs. Anybody else’s wife love Ikea or Target? Do you think those $5 lattes every morning are helping your 401k? The idea is not to place blame here, just to identify areas where money can be “found” and used toward your goals. These are quick easy ways to boost your budget and create surplus. Other areas to check when looking to tighten the budget are grocery bills, money spent at restaurants, family hobbies, vacations and activities. Again focus on you! Don’t bring up her expensive hobbies or the $150 salon appointments. When she’s ready, she will identify the things she’s willing to sacrifice. Don’t force it. Also be sure to include your kids in this as well. They’ll have fun thinking of creative activities that are free or cheap. Just make sure to let them know that whatever they sacrifice is only temporary and not necessarily permanent (although you may find that some changes WILL become permanent now that you realize you can live on spending less).
Another way to boost the budget is to supplement your base income. My wife and I both picked up extra jobs, but there are a number of other things you could do. Some examples: work overtime, start a small business, or start selling things around your home online. The idea is to create more income for your family in order to increase the amount of debt paid off per month. This is also a great way to create new financial habits because if you’re at work you’re probably not spending money! The main thing to remember is that this is not permanent! You’re making sacrifices today to improve your lifestyle for tomorrow.
The third step is to monitor your progress and report during regular budget meetings. Did you find some area of your budget look great on paper but just isn’t feasible in your daily life? This is the time to talk about it with your partner and make some changes. When making financial decisions I like to ask myself these questions, in this order:
- Does this fit in with our goals?
- Did we plan for this? Does it fit in the budget? – Early on you will probably want to talk about every purchase- this will help establish trust
- Is this going to matter in a week? -is this an impulse purchase?
- How does this purchase better our position? - is this a want or a need?
- How will this purchase affect me in 5/10 years?
In the final segment of the Family Finance Series, we will tie it all together and ask ourselves, “How does what I've learned about money relate to our kids?”