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Run the household and don't forget to plan for your yearly budget.
The start of the year is promising for anyone running a household. You make projections for spending and saving in the next twelve months, propose changes that will cut costs and bump up savings, and give yourself a pat on the back for taking that all-important first step.
The problem is that few of us end up sticking to our plans. Two months down the line, many of us will be scratching our heads at the ATM, wondering where all the money’s going.
Running a household isn’t necessarily expensive—it’s just not as easy to control the costs as it seems. Companies make it look easy with their end-of-year charts and progress reports, but the typical household doesn’t have a ten-man accounting team in its arsenal. When it’s just you, a calculator, a budget spreadsheet and a handful of mouths to feed, it gets a lot more complicated.
Planning is key
Hardly anything sustainable is achieved without a plan. When it comes to household spending, every move has to be calculated; how else would you know when a purchase is good or bad?
Budget planning should be both short-term and long-term. Big plans, such as buying a home, are easier to carry out when they’re divided into smaller tasks—saving up for the down payment, finding an agent, choosing a home, closing the deal, moving out. When every step is down on paper, it’s easy to know how far along you are and how much further you have to go.
Another reason to plan short-term is flexibility. Children, windfalls, and unfortunately in this economy, job loss, are all perfectly possible—and when they do happen, long-term plans like home buying obviously have to be set aside. Sometimes this leads to knee-jerk reactions that can cost you thousands, such as settling for the cheapest home possible or taking out an emergency loan just so the plans can push through. But if you have a backup plan, you’ll take a practical alternative instead of rushing blindly into decisions.
Setting your goals
Setting reasonable goals is closely tied to planning. Your goals will tell you what to plan for and how to distribute your resources accordingly. Most people, however, aren’t able to set realistic goals for themselves. They either aim too high and end up going off track because it’s simply not doable, or aim too low and don’t make the most of what they have. Your financial goals should be well within your means.
Here’s an example. You feel you’re spending too much on cafeteria lunches, so you resolve to pack your lunches from now on. If a cafeteria meal is $10, that means you save $50 a week; over a year, you should be able to save over $2,000 and take a trip to the Bahamas. But you’re forgetting that your packed lunch costs money, too: you buy more bread and salad every week, stock up fruits and vegetables, or try a few new dressings. Sometimes you even feel “entitled” to a fancy dinner. If you’re not careful, it will eat away at your proposed savings and you may hardly have enough for that trip in a year’s time. But if you plan more carefully, your numbers will be more realistic and you don’t set yourself up for disappointment.
Honest auditing
It’s always a good time to go over your spending for the past few months and see where the money is going. Those takeout meals on lazy days, the impromptu candy bars from your grocery trips, or the parking fees at the mall may be adding up faster than you think. The only way to gauge the damage is to track your spending for a while.
Perhaps more important than note-taking is honesty:. Don’t skim over minor expenses and make such excuses as “it was work-related” or “just this one time.” Every dollar spent counts—if you have to make sheepish excuses for it later on, then you probably shouldn’t buy it. Make it a habit to keep all your receipts and add up the numbers at the end of every month. It’ll help you see where you can size down without feeling the effects, at least not too much.
Cutting corners
This brings us to our next point: cutting corners while maintaining a certain quality of life. People tend to spend too much on food, but that doesn’t mean we should start eating fast food every day. However, it may not hurt to change other habits, such as taking the bus to work on some days instead of driving. You’d be surprised at how much you can save on day-to-day expenses without resorting to eating out of a can.
Start by classifying expenses as essential, good to have, and unnecessary. You’ll want to make your biggest cuts on the latter two, although you may be able to save on essentials as well (e.g. using less water, turning off the TV). Books, movies, and the like are usually unnecessary—electronic versions tend to be cheaper and take up less room. New clothes and junk food can also be done away with. Unless you need them for work or school, or they have monetary or sentimental values, leave them out of your budget for the moment. If, at the end of the day, it turns out you have room for them (after reaching your savings goal), then you can indulge yourself and the kids.
Room for luxury
Finally, and this may seem counterintuitive, allow yourself some room for luxury. That’s what the “good to have” category above is for. These things are the ones that improve your everyday experience, although they may not do so for everyone. Some of us will settle for no less than fresh brewed coffee in the morning; for others, high-quality bed sheets are non-negotiable. Give yourself room in your budget (within a reasonable range) for personal luxuries, so you can cut costs elsewhere without feeling deprived. If they can help you stay on budget longer, then the few extra dollars may be worth it.
