Creating a household budget

By Rob Levey

According to recent studies, Americans are spending more and saving less, and not tracking their expenditures. But financial experts say it is not as hard as people think to create a workable household budget.

Track your expenses

According to Katherine Fredette, Certified Financial Planner and Volunteer Income Tax Assistance Program Site Coordinator, the first step in creating a budget consists in tracking one’s expenses over a period of time.

Noting it is crucial for people to identify needs versus wants, she said it is equally important to distinguish between fixed, variable and periodic costs.

In tracking these expenses, Tim Dabrieo, financial advisor with Waddell & Reed, Inc., said it is imperative people pay particularly close attention to their “pocket expenses.”

“Once a family puts all of their monthly expenses down on a piece of paper and then sees how much money they are spending on coffees, going out to eat, hobbies or anything else that is considered pocket spending, they are usually quite shocked,” he said.

Lori Wiggett, HomeOwnership Center Manager at Affordable Housing, Education and Development Inc.in Littleton, agrees and said looking at their expenditures in general is precisely what people tend to avoid.

“It’s fear,” she said. “If they track their expenses, they’ll know the truth about their money. A lot of times, people feel so overwhelmed they don’t know where to start. Budgeting is a way for people to take control of their lives.”

Set and prioritize your goals

Before even tracking one’s expenses, Dabrieo suggests families start by identifying their life’s goals.

“The first step a couple should take is to write down what they want to do — go on a family vacation, pay off debt, save for their children’s college education, or build an emergency fund for example,” he said. “Next, they must have a deadline for each goal and an amount.”

In helping people to not only identify their goals, but also to prioritize them, Dabrieo said he often finds people uncover some of their “other underlying issues or points of concern.”

Referring to financial management as “a life skill carried over from generation to generation,” Wiggett added that people must also accept their money problems “didn’t just happen over night.”

“It took some time to get into it and it will take some time to come back out of it, but it can be done,” she said.

According to Fredette, benefits from goal-planning extend far beyond making sure the numbers work.

“It can ensure everyone is on the same page and can reduce stress and arguments about money,” she said. “Goal planning provides an opportunity for honest communication.”

Keep your budget flexible

For Heather Weste, Asset Development Coordinator for Rockingham Community Action, the most important thing for people to remember about a budget is “it will constantly change.”

“Be flexible,” she said. “Be gentle on yourself — and if you go over your budget, look constructively at ways to make changes in the next month to meet your budget.”

Fredette uses a trip analogy to describe the budget-making process.

“You can still make detours on your trip and in your budget,” she said. “Budgeting shows you what you have to work with day to day.”

However, Wiggett said families must take into account the nature of the detour.

“The first thing is to determine if this is a short or long-term situation,” said Wiggett, who noted many people “don’t know how to adjust” when unforeseen circumstances arise. “Losing your job might be a temporary change, but a divorce is something different. You then need to create a crisis budget.”

Weste said creating an emergency fund is another way to allow for a flexible budget.

“An emergency fund is essential because things go wrong,” she said. “With an emergency fund, your quality of life will be higher since your stress level won’t rise as much if you have a small backup in the bank. Start with $500 and see how it improves your ability to reduce stress in your life.”

Ask for help

Regardless of a family’s specific financial circumstances, Dabrieo said “having a third set of eyes look at your cash flow” can be very helpful.

“If you want to know what a Roth IRA is, what a whole life insurance policy is, what your marginal income tax rate is or what a credit report means, you can simply go on the Internet, but how do you know what makes sense for your own particular situation?” he said. “That is where an advisor can be extremely beneficial.”

“I help educate families on the resources available to them but also help them to apply what makes the most sense for their situation,” he added.

Offering group education as well one-on-one counseling, Wiggett said their goal is “to empower people to know that they’re in control.”

“We help people think logically about where their money is going,” she said.

According to Wiggett, they help people from all socioeconomic backgrounds — even those who claim they “don’t have any money to budget.”

“Ninety-nine percent of the time, those people are amazed at the small things they spend money on and don’t even realize it,” she said. “I’ve seen some of these people increase their credit scores by over 100 points in just 12 months.”

Be realistic

Even with outside assistance, Weste said the key is for people to stay realistic and keep things simple.

“[Budgeting] doesn’t mean not drinking coffee at all — it means making coffee at home more often rather than spending $10 or $15 a week on coffee out,” she said. “It means buying a case of soda at the grocery store and putting a few in the fridge at work rather than stopping at the convenience store and paying $1 for each soda many times a week.”

Fredette stressed the concept of moderation and said the budget-making process is “not an all or nothing situation.”

Dabrieo agrees and said creating a household budget is about families prioritizing their needs and balancing them with their wants.

“It is not about the money, it is about decision-making — empowering yourself to make confident, smart choices and finding a healthy balance between your needs for today and saving for your goals for tomorrow,” he said.