Money can be a stressful topic for many American, especially in families with children. Many conflicts can arise when money is squandered away due to irresponsible financial decisions. However, the family’s financial life could be much better if they enacted a budget. Oftentimes we hear the word budget and it makes you feel restricted, when it ultimately can create financial freedom. Simply put, a budget is a plan for spending and saving (O’Sullivan & Sheffrin, 2003). Creating a budget is an important concept of microeconomics, because it encourages conscious decision-making.
When creating a budget, there are many things to consider. According to EPI (Economics Policy Institute), the family budgets consist of seven individual components: housing, food, transportation, child care, health care, taxes, and other necessities (2018). These are considered necessary expenses because they are generally needed in everyone’s life and may include fixed expenses such as a mortgage. Shelter, food, and clothes are the basics, but in today’s modern world, things insurance and internet are considered essential too.
However, the focuses of budgeting are on expenses that relate to the ability to make a living, and those that are necessary for your financial security.
Other types of expenses may not be critical to survival or day-to-day living, known as discretionary expenses. For purposes of a budget, they should be accounted for and considered while attempting to cutback so consumers can save money and redirect resources for more things of greater significance. Typical items and things that aren’t critical would include the entertainment, movies, restaurants, vacations, and expensive cars.
People can actually live without these things but choose not to. These things are the wants in life, not needs. For example, clothes are a necessary expense, but they should not come from a fancy department store when trying to create a balanced budget. Americans don’t need a steak either when they can have a grilled turkey and cheese panini at home. These trade-offs will greatly benefit the family budget. What you determine is necessary will be based on the goal of your family’s budget. Having the discipline to follow your budget will give you control of your money. Consider the opportunity cost you are being afforded when make better choices.
Achieving that goal of conscious decision-making essentially comes down to maintaining your budget guidelines, seeing if it can achieve your goals, adjusting your spending, and seeing what works for you. “It’s important to understand that financial education is a learning process that continues throughout our economic lifetime,” said Paul Golden, a spokesman for the National Endowment for Financial Education. Americans need to modify their spending habits as family size and income changes. Family budgeting can be a challenge but there are three things you can do to get started on the road to financial management: Track your expenses. Live within your means. Reduce your expenses.