Back to the Basics: Budget Building for the Holiday Season
Separate Wants and NeedsBelieve it or not, I suggest you start with one piece of paper to write down every line item of your new budget. There is something about actually writing it down that helps you mentally take stock of where your hard-earned money is going each month.
Start with your needs. These will be the bills you have to pay each month, or you will incur a penalty or late fee. Your needs will include things like your mortgage, utilities, and credit card bills – as well as other expenses like cable and phone bills for which you are likely under a service contract. Everything else falls under the “wants” category. This is where it gets challenging. For example, you may say, my child needs shoes every other month, and this is a need. If it is not something you have to buy to avoid a penalty, it is important to keep it as a want because you may need to weigh your options later on.
Do not forget to bake in some “quality of life” budgets like eating out at a restaurant, having a date night, personal spending, etc. It is important to think of everything you possibly can. Even if it seems small, like a Starbucks stop once per week, add it to your list of monthly wants.
Make Decisions on your WantsOnce you are done with your exercise, subtract all needs and wants from your monthly income and see what remains. If you have credit card debt, consider using any excess to pay that off as quickly as possible. Once credit cards are paid off, you can then use those funds for fun ‘quality of life’ purchases. Even if it takes you a long time to pay off credit, remember that the goal is to spend money enjoying your life in the present, not paying for things you did in the past.
If you find yourself in the red after your calculations, it is time to take a fine-toothed comb to your wants list. Where can, or should, you cut back to balance your budget to $0?
Expect the UnexpectedI always tell people, if possible, to have a small amount handy for unanticipated expenses - even if it is only $40 or so. For example, a relative comes into town without notice and you now have to host them for dinner. Instead of digging into your savings and dipping back into debt, you will have these funds on hand for emergency use. If you do not end up spending it that month, it becomes a nice little savings account for you!
Chip Away at Lofty ExpensesMost families cannot afford to pay for bigger ticket items like a vacation, the holidays, or a home renovation up front - but there is still a way to weave those longer terms expenses into your monthly plan.
For example, if you would like to take a spring break trip next March, and you estimate it will cost around $2,000, divide that amount by the five-month (November - March) time period until spring break. Then add that amount ($400 per month) to your monthly budget! By the time your trip rolls around, you will have the cash in hand to go. If you cannot save that much each month, you will need to consider bumping the trip back, taking a more affordable vacation, or seeing where you can cut some of your “wants” expenses.
It is also recommended that you have at least $1,000 in savings at all times to truly break the cycle of debt. Otherwise, things can come up, like medical bills, that can put you right back at square one. Making monthly budget decisions is a challenging task, but it is the first step to achieving a state of intentional spending that will put your family on a path to financial peace of mind. If you follow this advice, you have already done the hardest part!