Making Family Budgets

 By Michael Olafusi

Creating a family budget is not as hard as you think; and as it applies to most things in life, practice does make perfect. But I will give you that ultimate head start, and hopefully, you won’t have to practice hard and long to become perfect.

First, let’s get the foundation right. We’ll weed out all possible assumptions and build the knowledge block that will hold everything else.

A family budget is a quantified financial plan to manage the income and expenses of a family over a defined period. Let’s consider the elements of this definition individually.

Quantified financial plan

 
You have to detail your expenses and income in numbers. If you don’t have a regular paycheck and you don’t keep records of your income, then you’ll have to fix that first before making a family budget. You need to have at least an estimate, a fair financial value of your expenses and income over your preferred budgeting period. Towards the end of this post, I’ll show you how to get a workable estimate of your income and expenses.

Defined period
It’s been said, the difference between a goal and a wish is a defined time period. A budget is always made over a time period. For a young family whose major income source is the salaries of the couples, a month is great. For a family with children in schools and universities, and considerable income from business ventures; 3 months is better.

In more practical terms, a family budget is a family’s plan of meeting their living expenses, planned savings and investments. It helps the family members in fixing leaking pockets, understanding their finances, knowing the income they need to live comfortably, and to make near perfect money decisions. It fixes numerous family problems (present and future), especially the money problems. Both parents can give each other goals – expense limit and income growing goals.

So how do you make a family budget?

I’ll start with the wrong ways of making family budgets -

1.” My wife and I earn a combined salary of N850,000 per month. We should be able to save N200,000 per month.“

Wrong!

You don’t set a goal before understanding your finances – income and expenses. You need to have a good estimate (better if it’s exact) of not just your income but your expenses to decide on your investment or savings goal. If you have a goal you must meet, this will help you to know if you need to grow your income to meet it as not all goals can be met by cutting expenses. You can’t make N100,000 per month and expect to save N80,000 per month if you have a family. You’ll have to get a pay raise or do a part-time biz.

2. “Before I married I was spending only N30,000 per month on feeding, and it was because I was eating out most of the time. Now I have been married for 8 months and have been spending N70,000 per month on food. This doesn’t make any sense. I must peg our feeding to N50,000 per month.“

Wrong again!

Data is king. Start keeping track of your expenses on paper or spreadsheet. Only then can you set expense limit.

3. “With this new project I got for the company, my next month’s bonus is going to be huge. I must budget N300,000 for my GT Homes savings next month.“

Wrong!

Budget is not about building castles in the air. You don’t budget the money that’s not in your hands. Even if it’s more certain that the Sun showing up tomorrow, you only consider it in the budget of the period after you get the money.

4. “I don’t earn a salary; my expenses are irregular just like my business income. I can never be able to make a sensible budget.“

Wrong!

Budgeting is like a journey, starting is what matters most. All companies’ finances are irregular. Let’s use banks as an example. They make loans to people who might die and not pay up or simply be too bankrupt to pay. They have to make money from deposits of Nigerians who do not hesitate to withdraw everything at a split- second notice. And it’s like that for most companies, big or small. You already have an edge – you run your own biz. The extra stress in perfecting a family budget will rub off on your biz; you’ll develop money skills that will make your biz run more cost efficient.

Never feel like you don’t need a budget or can’t make a useful one. It’s not true and you’ll be worse off for thinking so.

So, back to the original question – how do you make a family budget?

It’s as simple as 1, 2, 3

1. Start tracking your expenses and income. Get a good estimate of how much you spend per month (or 3 months) and how much you earn per month (or 3 months). Spread your house rent and other less recurrent expenses over a month’s ( or 3 months’) period.

2. Analyze the records. Note where you can cut down on expenses. Set an expense limit.

3. Make a plan. Include your savings goal, investment goals and long term goals. Get a family budget worksheet. (send me an email at michael@olafusimichael.com and I will make one for you, free).

What next?

Stick to the plan.

Review the plan at the start of every budgeting period. Don’t adjust it in the middle of the period, better to end the month with a budget surplus or deficit. Fix the errors at the beginning of the next period. The discipline you’ll develop will help you in the long run.

Finally, learn personal finance - the art of making your money work just as hard as you did for it. You need the knowledge of personal finance to cater for financial emergencies, to build a viable road map to your long-term financial goal, and to make the most of each Kobo you have left at the end of the month.

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Michael Olafusi is a MS Excel Consultant, a Personal Finance expert and a Tech geek. He blogs at www.olafusimichael.com.