It is time to take control of your family’s finances. Today is the day. In this blog post, we will discuss some practical steps to help you get started creating a cash-flow budget that works for your family.
To create your first cash flow budget all you will need is the following:
- Pen or paper (or a spreadsheet) to write all this down.
- A time period for what your budget will cover (start with your pay cycle).
- A list of all your income in your time period.
- A list of all your expenditures in the same time period.
- Calculate your net cash flow.
But before we get started we need to have ask the all important question behind everything you do: why even do a budget? It helps to know the why behind what you want to do before you get started on the journey otherwise you’ll be prone to give it all up when you hit a rough patch.
And if there’s one thing I’ve learned about budgeting – it’s for the long run and there will come challenges.
So before you get started, try your hand at answering these questions first before getting started with the mechanics of constructing and designing a budget. These questions will help give some clarity on what you really are trying to achieve by budgeting:
- Do you want more money in your pocket? Why?
- Do you feel anxious about the future? Why?
- Do you want to take control of your finances? Why?
- What things in life do you really want that will require some sacrifice and savings? (Some examples to get you thinking could be: a healthy retirement balance, a paid for house, paying for children’s education, giving generously to charity/church, going on a big trip, renovating the home, etc.) Why are these things important to you?
When you answer these questions you’ll have some insights and reasons on why you want to budget.
If you find your answers aren’t strong enough then I’m afraid you’re going to give up along the way. Without firmly having settled in your mind the purpose behind doing a budget you will find it a chore and be inconsistent.
What you will find when I first started budgeting was that I behaved really well after doing a fresh budget. I was on fire to achieve my targets and was strict on myself with what I could and could not spend, but as time progressed and I didn’t keep my budget in view I forgot how much I was budgeting for certain expenses and didn’t realise I was overspending.
I started to blame the budgeting process for being at fault, even though it was me who was being indolent about sticking to my financial goals.
All that effort in the early days after doing a fresh budget was all undone by being lazy in those later months. Therefore, it’s important to get the right motivation behind why you’re doing a budget first, before embarking on how to get it up and running.
So it helps if you’re passionate about something whether it be avoiding anxiety, or being in control, or achieving something. If you’ve got something that can light that little fire in your belly then it can help set you up to get through the budgeting journey.
Before we jump into the mechanics, let’s answer a popular question people ask about budgeting and why they struggle to get started in the first place:
Why is budgeting so hard?
There are a couple of reasons budgeting is difficult for families, besides feeling tied down and having a sense of freedom (or free-spirit) taken away, there are some more technical issues for why people struggle.
So before we start building a budget let’s have a look at some common issues we and others have found in getting started with a budget.
Firstly, how can you construct a budget for an item which has wild variations throughout the year. This could be due to someone’s income that is based on performance, or even something as necessary as buying groceries every week.
Our biggest culprit when constructing our first budget was trying to gauge how much to allow for groceries.
And even though we still see wild swings in our actual grocery spend we tend to just average out what we’ve spend and add a little buffer to compensate for those times when we tend to spend a little more than normal – usually around birthdays, and the Christmas and New Year period (see the spike in our weekly grocery spend below).
# grocery chart image
Secondly, how can you predict what a provider will charge you next month or next year when your renewal comes due? For example, insurance premiums or even utility bills.
This will take experience and time. You’re not looking for perfection with your budget each month, you’re just trying to formulate a plan on what will likely happen if all things are “normal” (whatever that is).
Thirdly, and somewhat off the back of the previous issue, how do you predict when something unexpected comes up. You might be able to roughly guess what the increase in utility bills or insurances will be next year or next quarter, but who can predict when your children will need to be raced off to the hospital or dentist?
And this is why it’s important as one of your first objectives to gather some savings into an emergency fund so that you can be prepared to pay for these instanced when they happen.
It’s important to be able to answer these common technical complaints when doing a budget, as they will creep up when bills arrive or incidents happen. Be strong and firm and remind yourself of the importance of why you’re budgeting in the first place.
Remember, while budgeting may be hard, it doesn’t mean we should give it up entirely. What’s the alternative? Not budgeting and getting ourselves in a worse financial position.
Budgeting certainly isn’t a panacea to all your financial problems, but it will help guide you on how long it will take to get to your goals and what to do when you achieve it.
Now that you know why you’re doing a budget, and how to handle those technical difficulties and doubts when they come let’s start by seeing what we need to be able to construct your family budget.
What do you need to construct a budget?
First, you need time. This process when done for the first time will not happen in 5 minutes. So you might want to start this when you’re clear of the kids, perhaps once they’re down, or before they get up.
Then all you’ll need next is either a paper, pen and calculator to write down your budget lines and do some calculations, or, what I personally prefer: a spreadsheet to help with the calculation component.
When you have all these things then we can start moving on to building our first budget.
What should be in a budget?
Now that we have the core elements of constructing a budget we now need to build one.
First, you need to think of your time horizon. Ideally, start small. It’s actually easier if you can start in the cycle for the frequency of when you get paid.
For example, if you are paid weekly, start with a weekly time horizon, if bi-weekly/fortnightly then use that instead.
By casting your budget in terms of your frequency of pay it helps to get your mind around how to get cash flow positive – having a net cash flow that is a positive number. So by starting with a time horizon that matches your pay cycle you’ll become more familiar with the budgeting process and when you get used to the process you can change your time horizon to whatever you’re comfortable with, but ideally monthly is the way to go.
Now that you have your time horizon it’s time to think of what will be happening during that time horizon.
Next start by making a list of all the income you think will be coming in during your time horizon. List them by name so you can easily identify them, put their amount and when they will be hitting your bank account or receiving the cash.
Some ideas to think about for this category would be:
- Salary or wages;
- Interest from investments, savings account, and other interest generating accounts;
- Other income (i.e., bonuses or gifts)
This first list with corresponding amounts is your inflow or income list.
If your budget is done during the time horizon of your pay cycle then you would be entering at least one pay. For now you can just insert your net pay (the amount that you receive in your bank), but if you can you should enter your gross pay as one line and then your deductions and taxes as separate negative lines in the income area that produces your net pay.
The reason for this is we want to start looking at strategies on how we can legally minimise our taxes and other deductions and by having these separated out when you do your strategies you’ll be able to see their impact on your net cash flow.
Next do the same for your expenses, list how your money will be spent during the same time horizon.
Remember, keep the time horizon at the forefront of your mind and ask yourself the question: what expenses will you be paying during this time? Look at a calendar if it helps, be mindful of weekends, public holidays, birthdays, celebrations (etc) times when you tend to spend a little more than normal as the budget needs to incorporate everything you can think during the relevant time period.
In this expenditure list write down the item you’ll be buying, then write down the amount followed by when that item will be purchased.
For example, if my time horizon is just 1 week and I go grocery shopping on Tuesday nights and I spend $150 each visit (on average) then in my expenses list I write that down, “Groceries $150”. If my time horizon is fortnightly then I’d write “Groceries $300” ($150 times 2). If my time horizon is monthly then I need to check a calendar and count how many Tuesdays it contains. If the month contains 4 Tuesdays then I’d multiply the weekly amount by 4 ($150 times 4 = $600).
Here are some ideas to help jog your memory on what may happen during your budget time horizon:
- Rent or mortgage payment
- Food (groceries and take-out food or eating out with family members)
- Utilities (such as gas and electric bills, water, and sewer)
- Car payments
- Credit card payments
- Transportation costs (fuel/gasoline for your car(s))
- Insurances (car/auto, home & contents, life, health care)
Tally up the amount of all our expenses, this amount represents your outflows or expenses.
Calculate Net Cash Flow
To calculate your net cash flow you now need to subtract your inflow total from your outflow total. The result of this operation is your net cash flow.
If you have a positive number then this means you will have more cash at the end of your time period than when you started. If you have a negative number then this means you will have less cash at the end of the time period than when you started.
Having a negative net cash flow figure at the end of your time period is not necessarily a bad thing. There will be some periods where this figure will be negative and other periods where it will be positive.
What you want to try and avoid is having too many successive negative figures, or at the least, having only small negative figures, but then having a large positive net cash flow that is larger than the sum of the previous negative cash flow periods.
This is also why I prefer doing a cash flow that projects over a year just to make sure I’ll be cash flow positive for the year, even though I may experience a few months where I’ll be cash flow negative.
However, as we’re just starting out, we’ll get to strategies later. The purpose of this article is just to get you familiar with casting a budget for your chosen time period.
In this article you learned how to create your very own budget. You also learned about the main two elements that make up a cash flow budget, being: your income and your expenditure. You also calculated your net cash flow and while you can have periods where you will have negative cash flow this is okay.
Should you have too many periods of negative cash flow you’ll need to start thinking creatively on how to either earn more money or spend less. So often we think we can throw money at something and it will solve the problem, when all that was needed was a little time to think and strategise about a solution that may not cost any money was available.
Anyway, remember the primary focus with your first budget is not to be 100% perfect on every line item. The focus is to bring awareness to what is happening with your money so that you can be in control of your present which will lead to your desired goals in the future.