We all have a friend or family member who can't seem to grasp the idea of budgeting. It can be difficult to intervene and teach simple budgeting skills without breaking the bond of friendship. We'll outline the ways you can teach budgeting by creating an expense report, cutting those expenses down, and then help them monitor the budget.
Photo remixed from Max Strzelecki.
We've covered our fair share of budgeting tips, ranging from using webapps to track spending to using envelopes for cash. Here, we'll look at how to intervene in your friends' financial business and how you can guide them through creating an expense report with hands-on techniques. Once they have a good idea of their expenses, you can walk them through the process of cutting those expenses down with webapps, ditching unnecessary services, and lowering the cost by calling all their providers.
How To Handle The Budgeting Intervention
A budgeting intervention is almost as difficult as a drug intervention. While your friends and family might need your help, many might not be interested in it.
It's not required that you handle the intervention as carefully as say, a heroin addiction, but you still need to follow some basic rules for bringing up and handling the subject. For an intervention, Mayo Clinic recommends doing your homework ahead of time, which in this case means coming up with a plan so you're able to talk about and work a budget on the spot. If you have the time, don't wait; it only takes a few minutes. It's also recommended you stay on track the whole time. Don't veer off into gossip or conversation and move the discussion somewhere that feels more like a formal meeting place so you can get the job done.
In my experience, I found it best to wait for them to open the discussion when they complain about not having any money. For instance:
Them: Man, I'm short on rent again this month.
You: Really, why?
Them: I don't know, I just don't have enough money.
You: Have you ever tried making a budget? It's easy, let's do it right now.
I'm no financial expert by any means, but teaching ends up being as much a learning experience about your own budgeting as it is about showing someone the ropes. If you're excited about it, they might be as well, and it's not too difficult to make it an enjoyable experience. Most of these tips can be applied to any age group because at its core, the idea of budgeting is a simple one: make sure you have more coming in than going out. The trick is finding a method that someone will actually stick to.
Photo by MadLab Manchester Digital Laboratory.
Teach Them How To Make And Understand Their Own Expense Reports
It's a good idea to consider the type of learner you're attempting to teach budgeting. It might sound a little like school, but if you want to make it an enjoyable experience you have to show them how to do it in a way they'll understand and actually implement in the future. This might mean you need to use visualisations or speak clearly about everything you're teaching them. Basically, you need to teach the budgeting in the same way you would to a child, but use grown-up language.
The biggest thing to remember is that you're not setting up a budget for them. You're guiding them through doing it. The basics are always the same — you can't spend more than you earn — but the methods are going to change from person to person. The overarching goal is to minimise expenses and learn to save, but the first step is to get a better view of what you're working with. You may find doing the initial expense sheets by hand instead of using a web or software service works better to lay down the foundation. Here are some ideas for doing it.
How to get the numbers: The most difficult and time-consuming part of making a budget is tracking down all the numbers and expenses you need to correctly make a budget. Monthly bills should be easy enough, but they'll need to take a look back at their monthly expenses on groceries, petrol, and other random charges to properly get an idea of average expenses.
One way they can do this is to print out a couple months of their bank statement and then highlight the different types of expenses with coloured highlighters. For instance, they'd highlight all the bills in red, entertainment expenses in yellow, and transportation in blue. This gives the whole thing a more tactile feel and while it takes a little longer, it can embed those expenses in their memory more effectively than having a service do it automatically.
- Write Out A Simple "In And Out" Expense Sheet
If you're working with someone who doesn't have a lot of complicated finances but needs to get a good gauge on where their money is going, a simple two-table list might be a good way to go. Have them round up the expenses they categorised above and make sure they're being honest with the numbers. At this stage, there's no expense that should be left out, no matter how embarrassing or trivial it is.
- Start by listing out all monthly expenses in one column, with the other dedicated to the average monthly pay.
- Compare the two and make sure they're not spending more than they're bringing in. If they are, we'll go over some ways to cut your spending down in the next section. If money is left over, they're in good shape, and we'll figure out how to deal with extra cash in a little while.
- Put the list somewhere it will be visible every day so it can be seen, remembered and understood.
Graph The Expenses For A Visual Guide
If you're working with someone more artistically inclined, you might consider teaching to his or her strengths. For budgeting, this includes graphs and pie charts. With all of the data collected in the above steps they can do this pretty easily.
- To figure out your percentage, divide the expense by the total monthly income. For instance, if you're paying $60 a month for internet and you make $1500 a month, you divide 60 by 1500 and get four per cent. Do this for each of the monthly expenses. If on average there is money left over, put that in its own category.
- Now you should have a set of percentages that add up to 100 per cent, so it's time to make a pie chart.
- The chart doesn't need technical accuracy: it's more about the act of drawing it. For a pie chart, they can estimate the size of each slice. Have them colour everything so it's nice and clean looking, and then hang it up somewhere noticeable.
Figure Out Where And How To Cut Expenses Realistically
Now that current spending habits are in front of them, it's time to figure out how to cut expenses. This is going to depend on where their money is going, what type of entertainment they like, and how close to their limit they are each month.
To start, figure out if any money is getting wasted away. Take a look at all those discretionary purchases each month individually and see if you can find a trend. Often, it's as easy as noticing the $150 spent on coffee every month at a coffee shop instead of making it at home. Perhaps they have some monthly purchases that go to waste but are kept because they've always been there. Common expenses include:
To reduce the cost of expenses, you can spend some time on the phone with service providers to get them to lower costs. To cut your grocery and restaurant bill, consider our previously mentioned tips to start eating well at home while keeping shopping costs down. If they are one of the avid collectors that will purchase everything despite their financial situation, stress the importance of cutting in other places in order to do so.
Once expenses are cut as low as possible, they need to figure out what type of savings they need. If no potential vacations, credit card repayments, or big purchases are on the horizon, that money should go into an emergency fund to help pay for any unexpected expenses that may come up. If you're dealing with a person who seems to hate saving, remind them of a recent emergency like a car repair or medical bill they've had to pay for.
Now they should have an optimised budget where expenses are cut, the bills are as low as they can be, and it's as close to breaking even as possible. To show off a little, have them redo the expense sheets highlighted above to get a better idea of what has changed. Now it's time to figure out how to use those numbers and keep the budget on track in the future.
Photo by MoneyBlogNewz.
Three Easy Ways To Keep Them On Budget
Figuring out where the money is going and finding ways to cut expenses is only half the battle. The next part is figuring out a way to keep them on the budget. When they're starting out, a lot of people like to keep their monthly expenses on a wall where they can see them every day as a reminder. One person I talked to recently did so while surrounding their budget with pleasant images and quotes so it wasn't such a downer to look at it.
A lot of different ways exist to track a budget, but lets look at the simplest forms for beginners with simple expenses. These are easy, month-to-month style budgets for people who aren't dealing with capitol investments or large oncoming expenses. They'll need to tweak the methods over time to fit their lifestyle, but these will start them with a strong foundation to build on.
- Envelope Method: If you're teaching budgeting methods to someone who is more comfortable with cash than a card, the envelope method is one of the simplest to follow. This method involves coming up with specific categories and stuffing the budgeted amount of cash into that envelope. For instance, a monthly set of envelopes might include: food, entertainment, petrol and emergency. Some expenses like rent and utilities can't easily be paid in cash, so this only works for people who might struggle with their discretionary spending. In this example, you would help them come up with their proposed monthly budget, then hit up the bank and take out the cash. Each envelope gets filled with the budgeted amount and that's all that can be spent for the month (or week or bi-weekly, whichever they prefer). It's as easy as that. When the envelope is out of money, the spending needs to stop.
- Webapps and Software: For technology-friendly types, keeping track on a computer makes sense. Using a spreadsheet app helps keep totals together, and free options like Google Apps work well. Some online banking services also include budget management tools and calculators.
- Multiple Bank Account Budgeting: We've talked about the idea of bucket budgeting with multiple bank accounts before, but it's a really handy tool for those who are struggling to make their bills each month. Basically, set up two accounts, one for fixed expenses and one for everything else. This helps ensure the rent and bills will always get paid first and the rest of the spending can be doled out as needed. It's good for budgets that need flexibility or for people who just got a lump sum payment like a student loan or insurance payout.
Photo by Lisa Brank.
While we've talked about many of these tips in a way for you to help teach budgeting to someone else, it's just as applicable to your own budgeting. In my personal experience, I've found that helping friends set up their expenses always makes me revisit and retool my own. It's hard to gauge when it's a good time to intervene to help a friend or family member out, but hopefully this will help you teach them in a direct and simple way. Have you ever helped someone create and manage a budget? What methods did you use?