Saving with Mr. Money: Putting Together a Family Budget

Mr. Money knows a lot of people hate the word “budget” but you can’t control where your money is going if you don’t know where it goes. If it makes it easier, we can use the term “cash flow statement” instead.

So let’s talk a little bit about the steps you need to follow to set up that cash flow statement.

Step 1: Write down everything you spend

When Mr. Money says “everything,” he means “everything.” Write down how much you spend on your mortgage, your car payment, your food, your kids’ extracurricular activities, your insurance premiums, your clothes, your entertainment, etc. Be honest and accurate. Here’s a warning: you’re probably going to be surprised at what you are spending when you see it written out like that.

Step 2: Figure out what you earn

Now do the same thing but with the money you have coming in. Use your net income – gross income is before the taxes come out and that’s not helpful. You want to count only the money you actually have to work with each month.

Step 3: Compare the figures

If you’re like most of the people Mr. Money has worked with, your spending figure is going to be higher than your earning figure. That’s not the end of the world though. The budget can help you bring those two figures into balance.

Step 4: Look at the spending amounts you control

Let’s face it, you can’t do much to reduce your mortgage payment but what about that $1,200 per month food bill? Could you cut it down by shopping cheaper places or using more coupons or wasting less food? The answer is probably “Yes.” Look at your insurance costs. Maybe this would be a great time to start getting estimates from competing companies or calling up your current agent and asking, “Hey, is there any way you can get me a better deal?” Look at every single spending amount that you might have some power to change.

Step 5: Make changes and check back in a month

So you’ve made some alterations in where you shop for groceries and got a discount on your insurance. Now after you’ve applied those changes for a month redo your cash flow statement. Compare it to the older one and see if you’ve managed to spend less money.

Keep making changes. Keep analyzing what you spend and asking, “How can I spend less?”

That’s what’s going to make this budget work.

Step 6: Get your priorities in line

Once you start seeing what you’re spending, you can also look at what you prioritize. Do you set aside money for an emergency? Do you have money going into a retirement account and a savings account for your kids’ college education? If you don’t but you have money set aside for trips to restaurants, shopping for clothes at the mall, then you’re saying those things are more important to you than having money when you can’t work anymore or ensuring your children can get a higher education. Mr. Money doubts that’s how you really feel. As part of your budget, you need to realign your spending with your real priorities.

Now you know how to work on your own cash flow statement but we didn’t really talk about why budgeting is so hated. What do you think? What makes creating and sticking to a budget so challenging?

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