Jody Shiermeier wanted to have a third child, but the O'Fallon, Illinois, mom of two realized that she and her husband, Todd, had to make significant changes first. "We needed a bigger car, but we were barely making ends meet as it was," she says. "I knew if we were going to have another child, we'd have to find a way to afford it." So the Shiermeiers created their first budget. They wound up saving enough to pay half the cost of a new minivan up front (keeping their monthly payments below $200) and to welcome a new baby within two years.
Budgeting is a bit like flossing your teeth--you know it's good for you, but you tend to skip it anyway. More than half of all adults "wing it" rather than tracking how much money is coming in and going out, according to the nonprofit National Foundation for Credit Counseling. But as with that oft-overlooked aspect of dental hygiene (49 percent of Americans don't floss daily), having a plan in place to make sure the money coming in equals--and ideally exceeds--the money going out every month makes a huge difference.
It not only enabled the Shiermeiers to expand their family but also provided them with a sense of security. "Now I don't have to be scared of the next unexpected bill," Jody says. If you've been putting off budgeting, here's a tip to ease you into things: "Ditch the word budget," suggests Patricia Seaman, spokesperson for the National Endowment for Financial Education (NEFE), a nonprofit organization in Denver. "It's like 'diet,' which makes you feel restricted." You'll have a more positive outlook if you call it a "spending plan." Follow our three-step plan to make the process far less daunting.
1. Guesstimate Your Monthly Expenses
Forget about scratching notes on a legal pad. There are a slew of online calculators that will help you organize and update your financial information in minutes. Begin by determining your fixed expenses (such as your mortgage or rent, car payments, college and other loan debts, and child care) and your flexible expenses (costs that change every month, such as food, health care, and entertainment). While you can pull some of the info from your monthly bank and credit card statements, this also requires you to come up with ballpark estimates by category.
Be as honest as possible. If your kid's playdate snacks cost $20 each month, avoid putting down a lesser amount because it looks better on a balance sheet. And make sure you include any "fun money" you use to pay for manicures, movie tickets, and dinners out. There's no need to feel guilty about these expenses. After all, your cash isn't only meant for boring things like bills.
Don't let the preliminary numbers freak you out. At this point all you're doing is gathering information. "Seeing the many places your money needs to go can be scary," says Jordan Amin, Chair of the American Institute of Certified Public Accountants' National CPA Literacy Commission. "But once you have a system in place, you'll feel so much more in control."
2. Track Every Purchase
It's time for the hard truth. Chances are, there are a bunch of ways you fritter away hard-earned cash that you're not even aware of. If on a typical day you grab a sandwich from the deli, buy your daughter a treat after school, and spring for a car wash when you fill up at the gas station, you could easily be overlooking $20 that didn't get tagged. That can really add up over time. So for at least a week (or a month if you can), log every single cash purchase you make. "It's those little bits here and there, like coffee drinks and toys at the checkout counter, that can sink a budget if they're not accounted for," says Jody. "Every dime and every dollar spent must be counted."
Sounds nitpicky? It's not. "You need to have all the numbers in front of you, or else you'll never develop a realistic budget for your family," explains Jameel Webb-Davis, a financial organizer in Medford, Massachusetts.