Family budgets. We all know what they are. Chances are we’re even created a few over the years. But how many of us have managed to stick with them?
Sure, we start out with the best of intentions. But within a few months we’ve either blown it completely or grown tired of not having any of the luxuries we’ve grown accustomed to.
Even if we’re trying to get ourselves out of debt, or perhaps starting an investment fund, we still seem to falter. So why can’t we stick to a budget so we can live within our means?
One of the biggest reasons is a lot of budgets don’t cater for the expenses we encounter in day-to-day life.
Most expenses are fairly predictable. Your rent is always the same amount each week. If you have a mortgage, your monthly repayment will be the same every month (unless there’s a change in interest rates). And it’s the same for car loan repayments, magazine subscriptions, insurance premiums, and so on.
Because these amounts don’t change, budgeting for them is a no-brainer. You know exactly how much you need to earn each month to cover them.
Other expenses may vary slightly from month to month—grocery bills, phone bills, electricity bills, fuel costs, etc. But even so, you can enter a ballpark figure into your budget to cover any minor fluctuations.
The real problem is the expenses that come ‘out of the blue’. How much will you spend on car repairs over the next 12 months? What about medical bills? Home maintenance costs? Gifts? You have no way of knowing, and so budgeting for them seems impossible. One week your grocery budget gets spent on new tyres, and suddenly you’re worrying about having too much month left at the end of the money.
So what's the answer?
Unfortunately, there’s no perfect solution. But you can get a rough estimate of how much you’ll spend in the coming year by working out how much you spent in the previous year.
Start by gathering a year’s worth of information: bank statements, credit card statements, major bills and receipts, and so on. Now, using a pen and paper (or better still, an online accounting tool such as Receipt Bank or MyProsperity) work out what you spent every time you paid for something that wasn’t a fixed expense. Group them into categories (e.g. car expenses, home maintenance, clothes, etc.) as you go, but don't try to break it down too far—you just want a handful of useful categories. Then keep listing each expense under the relevant categories for the entire 12-month period.
Once you’re done, and know the amount you spent in each category, simply divide each amount by 12 to work out how much you’ll need each month. For example, if last year’s car repairs came to a total of $1,200, budget for $100 a month to cover this year’s car expenses.
This way, if you suddenly need a new set of tyres for your car you’ll have the funds to pay for them.
Of course, an expense may come up that exceeds your estimated outlay. But you’ll be a lot closer to having the necessary funds than if you’d just guessed or, worse still, left car repairs out of your budget completely. And the more years you do it, the closer you’ll get to the ‘true’ amount you need.
But don’t just keep these funds in your purse or wallet. Put them in a separate savings account instead. Better still, get the money deducted straight out of your pay and into the account. Not only will you have less chance of ‘accidentally’ spending the money, you’ll earn a bit of interest on it as well.
Now that you know what to do, it’s time to get started. Grab those bank statements and receipts, and work out just how much you need to save for those ‘out of the blue’ expenses.
And if you need a hand, get in touch with Gill, McKerrow today and a member of our Personal Financial Management Team will help you take control of your finances and your future.