The importance of following a family budget

Andrew Leckey

April 30, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

With tax season now just an unpleasant memory, it's time to turn the family's attention to another important task.

Formulating a personal financial budget and following it may sound as painful as completing a tax return, but it affords the best opportunity of getting financial concerns under control.

It's amazing how few families really try.

"A family with annual income of $35,000 to $50,000 will likely manage as much as $2 million over 40 years," said Brenda Cude, associate professor in family economics at the University of Illinois at Urbana-Champaign.

"You can't imagine a business handling $2 million without writing anything down or having a budget plan, but that's exactly what people do with their personal finances," she said.

There's a mental block about the process.

"The term 'budget' has such a negative connotation that we instead talk of 'cash management' with our clients," said Katherine Triolo, a certified financial planner with Financial Management Team in Appleton, Wis., and a member of the board of the International Association for Financial Planning. "Budgeting is similar to dieting, in that some people never need to diet because their metabolism works great and they eat healthy, while others must examine everything daily."

Start by tracking spending and income carefully over a three-month period. Write down all money spent in a small notebook you carry with you. It's easy to lose track, especially regarding cash.

"I strongly recommend a family meeting be called when a decision is made to do a budget, so that every family member becomes actively involved and is on the same wavelength," said Robert Oberst, chairman of the IAFP and head of R.J. Oberst & Associates in Redbank, N.J.

"If there are kids old enough to comprehend, they should be included so they understand the importance of using money properly."

List all income sources, such as wages after deductions, in a family budget book available from a stationery store. Don't include bonuses, profit-sharing payments or dividends until you're sure of them.

Write down all expenses -- not just obvious ones such as mortgage and auto payments, but also those traced through receipts and charge-account payments.

Important additional expenses are food, transportation, medical costs and clothing.

Totaling your incoming and outgoing expenses results in a cash-flow statement.

If you had an operating surplus of several thousand dollars, your net worth should have increased by at least as much. A negative income statement isn't good but is not so troublesome if it was due simply to one-time difficulties.

Once you've computed your cash flow, set priorities and outline a budget that adheres to what you want to spend and permits saving for the future.

Estimate how much you can put in savings each month, and do it faithfully. Allow some flexibility for the unexpected.

Consider which expenditures may be out of line, such as spending too much on dining out. Keep better track of your weaknesses.

Monitor the budget each week, and go over figures in depth every six months.

Be realistic in your plan, so you're actually likely to follow it.

After-tax income of the average two-income family is spent as follows: 17.7 percent shelter, 17.5 percent private transportation, percent food, 11 percent personal insurance, 6.9 percent clothing, 6 percent utilities, 5.2 percent entertainment, 4.3 percent health care, 4.2 percent household furnishings, 3.4 percent household operations, 2.5 percent cash contributions, 1.8 percent education, 0.9 percent public transportation and 4.1 percent miscellaneous.

"A flaw of the budget system is that people stick with specific amounts each month, rather than exploring how to make do with less," cautioned Amy Dacyczyn, publisher of the Tightwad Gazette newsletter, R.R. 1 Box 3570, Leeds, Maine 04263 ($12 annual subscription for 12 issues), and "The Tightwad Gazette," a book published by Random House.

"Another problem is people blindly hold to certain budget percentages set up for them, when they should evaluate based on their own value system."

Finding a lower-rate credit card, reducing food costs by using coupons, examining your insurance to see whether coverage overlaps and monitoring gift-giving are ways to improve your finances, Cude suggested.

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