Why some people leave paycheck to paycheck their entire lives and some accumulate wealth over time and create financial freedom? The key is financial discipline, which starts with planning and budgeting. With all the demands of running a family, especially large family, it’s hard to find time to make a household budget — especially if spend more than you make. It’s important to look household finances squarely in the eye, because that’s the only way to control them; otherwise, they control you.
Start by understanding what is your goal. Maybe it’s paying off debt, save for retirement, get money for child’s wedding or perhaps it’s a college fund. You don’t have to justify your goal to anyone, and envisioning it can help keep you on track.
Step 1: Choose your budgeting tools
I Recommend Excel for budgeting. But Paper works too. Pen and paper can be just as accurate as an electronic budgeting program, but financial software certainly makes the job a lot easier. It also reduces errors.
If paper feels right, an accounting ledger doesn’t cost much and is designed for credits and debits. In everyday language, credits are incoming dollars and debits are outgoing. You’ll also need a calculator.
Everything that shows incoming and outgoing money, such as earnings statements, receipts, bills and bank statements, has a place at the budget table as income. Everything that you spend goes into expense category. You’ll need a total for both categories. Sometimes you realize that you spend more than you earn and this gets people nervous. But dont’t be: going through the budgeting excercise will help you control that.
Step 3. Find Out Where the Money Goes
The outgoing category needs more attention after you’ve got a grand total. The next step is breaking spending into subcategories. Yours might be Rental Payment, Utility payments (electric, water, etc.), Mortgage, Credit Card Debt, and Discretionary Spending (entertainments budget, lunch, clothing, etc.).
Discretionary spending adds up fast. A few dollars here for movie tickets and a few more there for dining out sometimes total more than a fixed bill that you pay every month. This is the subcategory where you can create the most change.
With the initial totals and categories prepared, now you can add everything to an electronic spreadsheet. This is where the budget begins to take shape. The goal is to get your debits (spending category) less than your credits (income category).
Step 5: Start Practicing Budget
The ultimate goal of any budgeting process is to produce cost savings and create a better financial future for you. You can plan as much as you want, but the most important thing in any budgeting process is execution. And essential part of execution is to control discretionary spending
With the numbers in black and white, you can approach the monthly budget more realistically. Discretionary spending might be the only category where you can find and divert money toward debt reduction and saving.
Step 6: Pay Off Debts
Debt reduction is the main goal of many families. The only way to get there is to make at least the minimum payment each month. Paying more than the minimum obviously reduces debt faster, but it can also mean you’ll pay less interest.
Check with each creditor to be sure extra payments will post the way you want them to. In some cases, interest is a fixed amount that won’t change, regardless of whether you pay more each month.
Budgeting is both simple and complex. It’s only a matter of knowing what you earn, what you owe, and where money is spent. What makes it complex is deciding where to cut back and where to divert more money. For some families, debt is a real problem. Without enough resources, debt can mount and credit scores can tumble.
Once you have established routine you might need to come back and make adjustments. Review how your process is going to see if you are on track or not every few weeks and make adjustments as necessary. Good luck taking your finances under control. Also, make sure to check out below videos and online training courses to learn more about budgeting tools you can use to save more money
Smart Family Finance Video Tutorials:
- Budget should fit your long term goals (Important of setting goals first)
- Budget helps you build a set of rules to make decisions
- Document everything. Budget helps you see real financial picture
- Budgeting is collaboration with other on decision making
- Family Finance and Budget. Different ways of planning
- Spending vs. Consumption planing
- Planning based on financial goals
- Planning based on priorities
Definition of Investment: spending money on activities or assets to create future revenue stream
2. Example of Investments (Ongoing or Projects)
- Get education to be eligible for higher paid jobs (Cash investment or Student Loan)
- Learn a new skills to get promoted (No cash investment but time commitment)
- Contribute to 401K (Before Tax Monetary Commitment)
Lesson 5. Build Wealth without making a lot of Money
Questions we look at in the video:
- Spending should not exceed Income. Track Spending and create budgets.
- Establish Emergency Fund with Liquid Assets
- Goal 1: Increase assets and decrease liabilities over time
- It is OK to borrow for investment.
- Borrowing doesn’t pay off for consumption
- Focus on Growth of NetWorth
- Goal 2. Convert regular Income into Portfolio Income
- Invest 15% of income for retirement. Use Index Funds to diversify
- Set Goals. Track Progress. Re-evaluate annually
Make sure to review below mobile friendly video on the topic:
- Download MS Excel Budget Planning File file
- Review my other Budgeting and Personal Finance Video Tutorials
- Subscribe to my email list to receive more tutorials like this one: