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OK, so you've decided that it's time to get your financial house in order. You're probably thinking that you don't even know where to start. But like any trip, if you want to get somewhere specific you have to travel with a preplanned route in mind. If our goal here is to gain control of our family finances, we'll need an organized plan of action.
Recently, the Dollar Stretcher mail box has been full of questions from families that want to control their financial future. Some are looking for ways to ease a transition to a one income lifestyle. Others are concerned that they may have to survive a corporate downsizing. Beginning with this column we'll be looking at how to address these issues. Today we'll look at the overall plan. In future articles we'll examine each area in more detail.
First, You'll need to assemble a basic budget. Oh no! There's that scary word: budget! It's up to you whether you choose to be scared or not. But if you want to gain control of your finances there's no more efficient and adequate tool to do the job.
Budgets are really pretty simple if you strip them down to their basics. A budget is just a record of your income and expenses by category. You'll need to keep a 'planned' budget and then compare your 'actual' figures to your plan. No magic here, just simple math and record keeping.
You'll need to know your starting point. What's happening with your income and expenses today. The best way to accomplish this is to go back and see what's actually happened over the last three, six or twelve months. If that seems like too much work, you can just begin to keep track of your income and expenses today. But you won't be able to make any comparisons or corrective steps until a number of months have passed.
Once you've determined where your money comes from and where it goes, you can compare it to other families. The comparison will highlight areas where you're spending more than others. Naturally, these areas will be the first places you look for savings.
Is your budget in balance? All the records in the world won't do you any good if you're regularly spending 10% more than you're making! You'll need to adjust your planned budget to avoid deficits.
If you're planning on adjusting to a one income lifestyle (or for any other major financial changes, for that matter) you'll also need to do a 'what if' budget. This exercise will allow you to see what would happen if you take that big step. (It's also a great tool for families that are worried about losing an income to 'downsizing'.)
The 'what if' budget is where you make the adjustments in your plan for the 'what if' situation. How much income would you have if only one partner worked? How would that change your taxes? If the need for two cars were eliminated, how would that change your expenses? What would it take to get this 'what if' budget in balance? You'll begin to see whether your goal is a just distant dream or something that can be achieved with effort.
For many families cutting spending will be the hard part. You'll be discussing the touchiest areas of a relationship. It's hard to agree to give up some of our spending. What she views as an extravagance, he'll view as a necessity.
But, fortunately, you'll have an advantage. That fact that you have a joint goal in mind makes it that much easier to compromise on the necessary activities to accomplish that goal. One word of caution here. Be sure you're both on the same wave length when you put your plan together. Failure to 'buy into' the decision will cause problems later.
For most families, no financial plan would be complete without a debt reduction strategy. Interest payments sink many a family budget. Your financial house isn't in order if you're carrying balances on credit card accounts. It's far better to have interest working for you rather than against you!
A part of any long distance trip is keeping on course. It surprising how quickly small deviations from your plan can add up and leave you lost in the financial wilderness. You'll want to develop a strategy to compare your actual income and expenses to your plan. The process will teach you what's working and what's not. Some areas will need refiguring. Somes expenses will require additional discipline to control.
Savings are also part of a thorough plan. You'll use savings to get through unplanned rough spots on your financial journey. Let's face it, from unexpected auto repairs to medical bills, life is full of unplanned pitfalls. While we can't predict which problems will come to us, we can prepare to handle the unexpected. Most often the solution we'll use is called 'savings'.
Periodically you'll want to celebrate your successes. The destination in your family financial travels will always be changing. In fact, it's more of a journey than a destination. But that doesn't mean that you shouldn't stop along the way and celebrate how far you've come. Not only are these victory parties enjoyable, they'll also help motivate your family to the sacrifices necessary to achieve your goals.
Whether your family is planning on a one income lifestyle or your just tired of financial surprises, it's wise to keep your financial house in order. In upcoming weeks we'll explore in depth each of these various challenges. Join in as we assemble a plan to make the most of the income you have available to you. It's a journey that you can't afford to miss.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. You can also follow Gary on Twitter or on his blog.
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