A household budget should be based upon a well-thought strategic plan for the future. I’ve already discussed how to establish your household strategic plan so you can begin to build a household budget that meets your long-term strategic plan. Remember, prior to creating a budget, you also need to track and record your spending over the previous several months and determine whether you are running a monthly surplus or deficit. Only then will you be prepared to create a budget that meets your household strategic plan.
Let’s look at the fictional Smith family strategic plan developed in a previous post. According to their initial strategic plan, over the next 12 months, the Smith family CEO set goals to: 1) add $4000 into their rainy day fund, and; 2) retire $2000 of credit card debt. Using a household audit worksheet, the Smith family CEO created this budget based upon their income and expenses that not only met those goals, but also eliminated their monthly $1500 household deficit in favor of a $30 surplus. You can use this budget worksheet from Mint.com to help track your own expenses.
As you begin to create your preliminary budget, you should ensure that it accounts for repayment of your credit card and student loan debts, and contributions to your workplace retirement plan at least up to the level of the company match, if applicable.
As illustrated on page 2 of the Smith’s budget sheet, the Smith family CEO incorporated his strategic plan into the budget by including a $250 monthly deposit into his savings and a $200 monthly payment toward his credit card bill. (True, the Smith family CEO would have been wise to consider temporarily forgoing the $250 deposit and applying it to the credit card bill so that he could concentrate on paying off his credit card debt sooner and avoid the additional interest payments but, in this case, he didn’t!)
When looking for places to squeeze out additional budget cuts, don’t overlook areas that you might consider, on first blush, to be untouchable. For example, utility bills are especially good places to cut the fat. Significant gains can be made by adjusting your thermostat, cutting back on water usage, and picking a less expensive phone plan. Indeed, as shown on page 2 of the budget sheet, the Smith family CEO did just that by making small budget cuts for many of his utilities.
Those of you who have been following my posts know that some items considered “needs” by most of us, such as groceries, are sometimes prone to expanding so that at least a portion of the monthly expense ends up falling in the “wants” category. For example, after determining that one-quarter of his $400 monthly grocery bill was being spent on discretionary items, the Smith family CEO originally entered $100 on his budget worksheet as a “want” with the remaining $300 listed as a “need”. Later, while building his target budget, he decided that he would reduce the discretionary portion of the grocery bill by $40. To reflect this, the “Final Budget” section of his worksheet shows a monthly budget for groceries of $360.
The bottom line is if the Smiths adhere to their budget plan over the next 12 months, they will have at least $3400 for their rainy day savings account ($250 per month for 12 months, plus an additional $200 for 2 months after the credit card bill is retired). Furthermore, if they are able to maintain their monthly $30 budget surplus, the Smiths will have another $360 to apply to the fund, putting them a mere $240 from their goal!
With only a minor additional modification to their budget, our fictional Smith family will soon be ahead of the game. The Smiths, with a strategic plan in place and a pragmatic budget to help get them there, are now well on their way down the road to financial freedom!
Oh, and to help you become a better budget planner, you may want to consider using a free on-line budget calculator. After all, when you’re looking for ways to save money, a budget is an important tool for helping you achieve you goals.
Remember, it is the job of the household CEO to ensure that the strategic plan and household budget is adhered to.
Do that and you will be well down the road to achieving a life of financial freedom.
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