How to Make a Household Budget Walkthrough Guide
Making a household budget can seem like a daunting task, especially if math isn't a subject you are particularly friends with. It doesn't have to be difficult. This guide will walk you through the steps to creating a budget you can live with.
Step 1: Paper or Electronic?
The first thing you need to do is determine how you are going to keep track of your budget. Your options are with pen and paper or electronically. Which method you use will have a lot to do with things like your goals, your personality, and what works best for you. Each method comes with its own advantages and disadvantages. You may want to try both and see how each makes you feel.
Advantages and Disadvantages of a Paper Budget
Paper budgets have been around in one form or another since people started trying to manage their money. Advantages of this type of budget include:
- You don't have to share sensitive information online.
- Many people think more clearly when they work with pen and paper.
- You are in complete control, needing to manually enter information, decide what goes where, and when, etc. so you don't become complacent.
- Many individuals feel panicky when they work with numbers and can't think clearly.
- You have to remain consistent with making entries and following through.
- It can be difficult when more than one person needs access to information at the same time.
Advantages and Disadvantages of a Electronic Budget
There are a variety of options available in regards to electronic budgeting systems. Some require manual input and others can be set to be fairly automated. The advantages of an electronic budget include:
- Many are set to make it easy to set it up and then let it do the majority of the work.
- Information is easy to access from multiple devices, which makes sharing information easier.
- Many programs allow you to print out different reports that can give you more detailed information.
- Disadvantages of electronic budgets include:
- You need to put sensitive information on the computer where, in rare instances, it might be compromised.
- With a hands-off approach, you become disconnected from your budget, making it more complicated to follow.
- It is often more difficult to do the weekly or monthly tweaking necessary when you first start out.
We suggest you try both methods if you are not sure which method you prefer. Take a few minutes to go over the pros and cons of each method and determine which one has the most pros in your mind, coupled with the fewest cons. In addition, ask yourself the following questions:
- Do I want the freedom to tweak as needed or am I certain the first budget will work?
- Are you comfortable giving daily control of your finances to a computer program or would you prefer manual control?
- Who will share in following the budget and what do they prefer?
In the end, only you can make the final choice as to which method is best for you and your circumstances.
Step 2: Set Goals
In order for a budget to work, you need to understand why you need a budget. What are your goals? Do you want to get control of your money so you can save for a large purchase such as a house or vacation? Do you have a large amount of debt that you want to get rid of and need an active plan to make it happen? Maybe your goal is to simply be able to know your bills are paid in a timely manner and still allow you an occasional night out or enough money for a special item you want. Knowing why you want the budget will help you determine what categories you need to include and what your priorities are. Whatever your goal is, you need to determine it and make sure it is one that is strong enough to allow you to follow your budget.
Step 3: Identify Income and Expenses
Now you need to get an idea of what figures you are working with. This entails writing down all money you have coming in and all money that needs to go out.
- Income includes any money from a job that you actually bring home after taxes are taken out. This is net income. In addition to this, include any monies you receive for child or spousal support, any government stipends you receive and any money you make from self-employment. Make sure with self-employment income you take out the required tax money in advance so you have that put aside at tax time. When these are all added together, you have your Net income. This is the amount you have to work with.
- Expenses need to include all your expenses. This includes, housing, insurance, spousal or child support payments you make, tuition fees, savings you need to make, outstanding debt, transportation, basically everything. You may not have monthly figures for every category yet but if you've been keeping track of what you spend for several months, you have a general idea.
Hopefully, this step will help you see if your income does indeed exceed your expenses. If it does, you are ready to start putting a plan in order. If not, you will need to start looking into ways to either decrease your spending or add additional income. If your expenses are less than your income, you can skip the following step and move to step five. If not, you need to continue with determining the next step.
Step 4: Wants vs. Needs
Sit down and look at the account you have made of all your spending over the past few months. What things were absolutely necessary and which ones were mere wants. For example, do you need to spend a hundred dollars a month on clothing or is that something you like to do? If something is a necessity, such as food or utilities, is there a way you can reduce the costs by opting for turning unnecessary electronics offa certain portion of the day, running an air conditioner less, or opting for different food choices? Make sure you are completely honest with yourself over an item’s necessity.
Step 5: Creating Your Budget
Now it is time to start putting the percentages into action and create a budget. If you have regular expenses that do not change, it might help to figure out what percentage of your income is being spent on each of them. This will help you know what you have available to plan for when it comes to savings and miscellaneous spending. Working with both percentages and actual figures will be your most likely course of action.
- Write down the categories you will need and fill in any constant amounts, such as housing and insurance premiums. Figure out how those categories are matching up with the suggested percentage categories. How much money does that leave you to work with?
- Using the percentage suggestions and your personal figures, fill in the categories that change monthly. Make sure you include categories for saving and debt reduction.
We don't like to think about emergencies, but they do happen. By planning for them in advance, you have the ability to keep a bad situation from turning into a financial disaster that may take years to recover from. Houses need repairs, medical emergencies may cause loss of income, natural disasters occur without notice. When these things happen, you are already feeling stressed. When financial strain is added to the mix, it can be more than devastating. Having an emergency fund can ease that part of the situation.
How Much Should I Save?
This is a question that has no correct answer. Factors that help determine the amount include your age, where you are in your life's journey, what you would like to accomplish in the future and how much money you have to comfortably put aside. If you have a lot of outstanding debt, you may need to concentrate on paying it down and then increasing your savings percentage. A good rule of thumb is to aim for ten percent of your income. If possible, fifteen percent is even better. However, even if you are on a fixed income that will allow you to put aside forty or fifty dollars a month, that is still something that will add up and be there should you need it. The goal is to find an amount that you can comfortably put aside on a consistent basis.
Step 6: Putting Your Plan in to Action
Regardless of your income, you can make a budget that you can work with. All you need is to know what money you have coming in and what expenses are absolutely necessary each month. Tracking your expenditures over two to three months will show you where you can condense spending. Your first attempt may only include things like Housing, Utilities and Food but with consistent effort, you will see that you are finding ways to increase categories. Having a budget seems to automatically cause you to become super-aware of every purchase and know if it is necessary. Your spending choices become fine-tuned and it shows in having a few extra dollars here and there.
Step 7: Update & Adjust
Very few people can set a budget and have it be permanent for the rest of their lives. At first, you will need to tweak your figures on a regular basis. This allows you to make adjustments on the percentages of the irregular expenses and fine-tune your budget. Over time, your spending habits will change, your income will vary and life will put you in situations that affect your finances. This will all require going back and redoing your budget. You will find that your monthly tweaking sessions will eventually spread out where you'll only need to revisit your budget every six months or once a year, unless something major occurs that needs to be accounted for. Budgeting will become a vital part of life; a freeing, comforting one.