The Most Important Reason Why You Need a Budget

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I just finished an audit of our spending for the first two months of the year and one thing is brutally clear. We need a family budget!

Years ago we had a family budget, which I tracked closely month to month. Then life got in the way and I got bored with it and let it go.

I should point out that even though we stopped tracking our family budget, we seemed to just work it out each month to not go into debt. My wife manages most of our grocery budget spending and generally sticks to a weekly allowance we set years ago.

Most of our other monthly expenses are fixed like our mortgage, car payment, and cell phone bills. We also built in some padding from our past budget for extra spending when it comes to medical costs, money for the kids school (yes kids are expensive), going out to eat, etc.

So for the past couple of years, we have just been getting by without much thought or effort.

Getting By Does Not Cut it Anymore

We are now coming to realize that as our 3 children are growing older, our monthly expenses are growing with them. Sports, doctors visits, prescriptions, clothes, braces, you name it – the monthly expenses continue to rise.

Since our income has basically remained static for the past 2 or 3 years, it is time to revisit our monthly budget. Otherwise, at some point our expenses will overtake our income and we will be scrambling to fix our budget.

I prefer to be proactive when it comes to our personal finances, so just getting by is not going to cut it anymore.

We need a new family budget!

Family Budget Audit

The word audit typically gives me the shivers when I hear it. However, I think an audit of our monthly income and spending is just what we needed.

For the first two months of the year, I found several expenses that were certainly not a surprise. Our mortgage for example is a known monthly expense. We have a 30 year fixed rate mortgage where the monthly payment remains the same. I have actually started to look for possible refinance opportunities to help reduce the number of years on our mortgage but have not found anything yet.

Our car payment is another recurring expense that was not a surprise. What was a surprise is that we incurred 2 late fee payments of $6 each because I made the payment a few days late the last couple of months. It was totally my fault and I should have known better, but I got lazy paying the bills the past couple of months.

Then there are the variable expenses that are recurring but fluctuate from month to month. Utility expenses like natural gas, electric, and water for our home vary from month to month. Other expenses like medical bills, dining out, groceries, and all other entertainment costs also vary each month.

Even though there were no real big surprises in our spending, there are certainly some areas we can reduce our expenses.

What to Tackle First?

It wasn’t until I actually looked at all of our expenses for the past 2 months collectively that I found a few places to cut back.

Now – I want to be clear. I am not looking to give up everything just to save a buck or two. I still like my cable – although not at the current rate. I still enjoy my iPhone and am not ready to give that up either, although I may look at better plans.

The point here is that I want to cut back on spending that has zero value. This is one of the reasons why I started our investment challenge account a couple of months ago. We want to challenge all of our purchases to ask ourselves if our expenses are all justified.

A few places we want to start hacking away at our spending this month include –

• Grocery (4.7% in potential savings) – I spent a lot of money the past two months on some high end grocery items that I really did not need. I have recently started following the Paleo lifestyle and decided I needed to stock up on a bunch of things like high end nuts, nut butters, etc. To be honest, I bought a lot of items that I either did not like or really need. I don’t have to jeopardize my healthy eating by cutting back. I can just manage our spending a little better in this area.
• Late Fees (< 1% in potential savings) – While it is not much, there is nothing that frustrates me more than paying late fees. Besides my $6 late car payment fee, I had another overdraft fee in a checking account for $0.41. Sure not much but that is just giving away money to the bank for being lazy.
• Cable Bill (unknown savings) – While I do appreciate our cable, the rates have gone up 28% in the past two months. I keep getting letter after letter from the company stating how we are still enjoying a fantastic rate, blah, blah, blah. It might be time to look for other options.

A longer term look at our budget, I already know I want to revisit our mortgage. I am not necessarily looking to lower our payments but instead reduce the number of years to payoff the loan. We currently have 24+ years remaining on our loan and I would love to get that to 15 or even 20 years if it makes sense.

Another potential savings is when our cell phone plans are up this coming December. I think we have the potential to save $40 or more a month by switching phones and plans.

Final Thoughts

The number one priority for me right now is building multiple sources of income. I would rather work on earning more then cutting back. However, that is not to say that my family cannot cut back in certain areas. Avoiding late fees, shopping around for better deals on a mortgage or insurance, and looking for other options in cable is just smart finance.

The one thing I need to keep reminding myself is that any reduction in our expenses means more money to invest in the Money Sprout Index! Whether it comes from more income sources, a windfall of money, or cutting back on expenses by challenging everything we buy – I need to keep feeding our investment challenge account.

What are you cutting back on? Would you rather earn more money or cut back on expenses? Or a combination of both?