Creating a Family Budget

We’re going to talk about creating a family budget. Now, I don’t like budgets. I don’t like anybody telling me what I can and can’t spend. I don’t know if that’s a defect or whatever it is. I know some of you love budgets. You love to track things and so on. One of the things Wendy and I have always done is we’ve saved first so we can spend what’s left. So, if you’re younger, let’s say you’re in your 30s and 40s watching this, that’s a great strategy. You save 10 or 15% off the top, we’ll talk about that in a few minutes here, and then you can spend what’s left.

The power of budgeting

I would say it’s really an advantage, no matter what philosophy you take here to create some type of a family budget. And let’s talk about the power of budgeting. Number one, sometimes it just helps to know where you’re spending your money. You’ve probably heard about people that keep a little financial diary, one of those old reporters notebooks where they flip open and you write things down and you write down that you got a Starbucks on the way to work, and that was $4 or $5, or if you get one of the real fancy ones, maybe it was six or seven bucks.

You go out to lunch every day, on the way home you stop and maybe get together with some friends for a drink and you end up realizing what you actually spend in money. There’s a book out there called The Latte Factor, where it talks about if you just don’t buy a cup of coffee every day how much you save. And again, I don’t like to live that way personally, but I think it’s really enlightening to at least track your expenses for a month or two. What you’ll find out is that you are probably spending somewhere between 100 and $300 per month on stuff that you really don’t need to.

Like, what if you went to Dunkin’ Donuts instead of Starbucks and just got that $2 cup of coffee instead of the $6 one. So again, I don’t like budgets, but it will be really eye opening to see what you spend your money on. So with that said, let’s talk about creating a family budget. And again, this is important whether you’re retired or whether you’re still working, get a handle on where your expenses are going. And some of these things, we have a lot of control over, some of them we don’t.

Let’s talk about expenses

We’ve got two different types of expenses. You’ve got fixed versus variable expenses. And fixed expenses are things that stay basically fixed, not to the penny, but basically fixed every month. For instance, you might have a mortgage, you might have rent, you might have insurance payments, you might have food, you’ve got different things that are going to be for the most part the same every month. And this is easy to budget for because you just kind of know what it’s going to be.

Whether you subscribe to YouTube TV or you subscribe to your cable channel, your local cable channel, maybe you’ve got some of those extra items that you subscribe to. Maybe you’ve got like I do, you’ve got Spotify and things like that. These are all pretty much fixed expenses. You’re going to pay those every month. By the way, while I think about it, I discovered the other day that I was paying for three subscriptions for the same thing. I would subscribe and then I would forget I subscribed and three years later, subscribe again and so on.

So this might be helpful, we’re not really here to talk about this today but it popped into my mind, to go back and see what you’re subscribing to and see if you have two or three different accounts. My kids, by the way, are pretty good at opening accounts because they know my credit card number and they don’t do really bad things, but they might have a Netflix account or something like that. They go off to college and set up these accounts and all of a sudden, I look at my statement and there’s 9.99 a month. What’s that? Where’s that going to?

So keep an eye on some of those subscriptions. But getting back to my point, that would be a fixed expense. Any kind of subscriptions, insurance, food, you’re going to pay about the same every month for those things. Here’s the tricky part. When we’re doing a family budget, things like travel, gifting to children or grandchildren or to your church or synagogue or to other charities, recreational expenses, these are kind of tough. Because let’s say you’re a golfer and you might belong to a country club, well, the country club membership is typically fixed or pretty close to fixed, might go up a little bit every year.

But you might also play golf for a few months, eight times a month and then there are other months, well where obviously you might not play as much because maybe you’re doing something else, maybe just the weather’s bad. So these are different types of variable expenses, and it’s a little trickier to get a handle on those things. What I’ve found is helpful is look back over the last year or two and try to average those things out. And maybe you bump it up a little bit by 10 or 20%. Because again, you really want to get a handle on these fixed versus variable expenses.

Debt (the good vs. the bad)

Let’s talk about debt for a minute. And yes, I put good debt versus bad debt. What does that mean? Bad debt is debt on something that’s going to go down in value. Good debt is debt to finance an asset. And again, that’s pretty black and white line. It’s not like that for everything. There are exceptions. But good debt, in my opinion, would be a home mortgage. You’re living in a home, you could pay rent or you could own the home and take out a mortgage, but that would be good debt because over time home values for the most part go up or at least stay fixed.

Also, you’re going to have to live somewhere for the rest of your life, or hopefully you’re going to live somewhere for the rest of your life. And so I believe that debt on an appreciating asset like a home or like something else is good debt, meaning you’re not throwing that money away. What is bad debt? Almost everything else. Putting Christmas gifts or holiday gifts on a credit card, cars. The biggest area that people waste money throughout the course of their lives is buying cars. Yes, I know sometimes you need a decent car to go to work.

But leasing a brand new car every two or three years, financing a brand new car every two or three years, not a good idea at all. For many, many years, until we became somewhat well off financially, I never bought a new car. I would buy a car two or three-years-old. I could buy a really nice car. I needed to be able to take clients out for lunches, be able to take maybe business partners out or peers in the industry and I wanted to be driving a nice car, not a super luxury car, but a nice car. But quite frankly, people can’t tell whether a car is three-years-old or brand new as long as you keep it up nice.

But you can save a ton of money by buying a three-year-old vehicle. So again, debt on a car is bad debt. Why? That car is going down in value. That vacation, the money’s already spent. Those holiday gifts, the monies are already spent. Anything you have to finance that goes down in value, that’s what I would consider bad debt, and be very careful of it. Okay. I’m going to come back to that in a little bit.

Let’s talk about charity

Some of you have charitable interests and some of you make it very, very consistent what you give to charity. It might be a church. It might be a synagogue. It might be something like St. Jude’s, which I personally support, other organizations where maybe you’ve made a monthly commitment. I have a client that I was just talking to last week, public television. They support public television. I think they can have 100 or $200 a month for the last number of years to public television. So those types of things I would work into the budget. In fact, I would encourage you to work into the budget because I believe charitable giving is really, really important.

Remember, some of the ills of society, some of the challenges of society can only be solved in one of two ways, private charity or the government stepping in. And I would much rather have those needs if they can be met through private charity. So I believe it’s important that we all at least consider supporting charity. But again, some of those things can be monthly budgets. I have a friend of mine that started a church in Hartford. We support them with a certain amount of money every single month. I should put that into my fixed expenses.

So charity also can, obviously, as you know, you can get a tax deduction. In my state of Connecticut, we get a tax deduction from the federal standpoint. We do not get a tax deduction from the state, but most states you actually do get a tax deduction. So, that kind of leverages your gift up a little bit, but that should be part of your budget. And then last but not least, college. Now here’s a big one. Here’s a really, really big one, and I’m going to preach a little bit here. Because of the business that I’m in, because we see so many people, I cannot tell you how many people I’ve seen that are in their 60s that are going to have to put off retirement because they went way into debt sending their kids to very expensive private schools when their income didn’t really afford that.

It’s okay to do those things. You don’t have to send your kids to the most expensive schools possible. And yes, I know in some towns out there, it’s kind of a status symbol if you can say, little Johnny went to Harvard, instead of UMass. But, it’s very, very important that you don’t put yourself in retirement peril. Now, one other thing that as a new grandparent that I know and some of you need to be aware of is you can pay college expenses for a child or for a grandchild and it’s not it a gift, so just a little tidbit there.

But these are the things that need to go into a family budget, fixed versus variable expenses, debt, you’ve got to get a handle on debt. And make sure if you retire, the only thing you have is a mortgage. Okay. Make sure you don’t have bad debt. And then of course, what are you going to go do for charity? What are you going to do for college? Last thing, if you are still working, if you’re just getting started in your career, the magic bullet, one of the most important things that will dictate your retirement security, in fact it will dictate you being wealthy someday, is if you can start early and put 10 to 15% of your money away in savings.

If you’re still working, save 10 to 15%. Now if you’re not saving enough, I know that sounds like a huge number. Maybe you need to work up for it. What I have found is when clients take the big leap, when somebody we recommend they start saving 10% and they go from zero, it hurts for a few months. After a while, you don’t notice it. So make sure you’re saving 10 to 15% and that’s worked into your budget if you are still working.