Creating a Household Budget
Photo Credit: Alexander Grey, Unsplash
According to statistics, money is the most common source of household stress. That being said, many people need a mechanism to track where their money goes after it enters the house. Keeping track of spending is critical to developing a family budget, so you can understand your patterns and spend more sensibly.
This article is meant to give valuable tips to individuals making a family budget for the first time. It follows the same concepts as many other popular personal finance applications. These principles should be used with any interactive budgeting application you may like to employ.
Budgeting Basics
1. Know what you make
2. Know where you spend it
3. Differentiate between necessary and unnecessary costs
4. Determine the difference between your earnings and your expenses
5. Align your expenditures with your profits
After gathering the information below, you may design your budget using a ledger, spreadsheet, or personal financial tool; most people use Excel or Google Sheets.
Know What You Earn
Include your take-home pay and any other revenue that you anticipate generating in the current year. Typical examples are salary, rental income, investment income, gratuities, pensions, royalties, and child support payments. Gifts or bonuses may be added if you are confident that you will get them in the next year. Be careful to subtract all necessary taxes and prepay check donations so that your income total accurately represents the money you have available to spend.
Know Where You Spend It
Make a monthly budget for your spending. Begin with the necessities — housing, food, and clothes — then work down to the nonessentials.
Credit card bills and bank statements are excellent places to start when developing a budget, mainly if you use these cards frequently. For example, if you use a debit card every time you go grocery shopping, it would display as a distinct line item on your bank account, making it easier to track. Because most individuals purchase the same products at the same retailers, you may organize your budget similarly. If you buy groceries at Food Mart, beauty goods at Beauty Mart, and bulk things at Wholesale Mart once a month, these can all be budget line items.
Items to Include in a Household Budget
Housing
Mortgage payment
Rent payment
Line of credit payments
Other homes
loan payments
Home or rental insurance
Real estate taxes (if paid separately from your mortgage)
Condo fees
Home improvement expenses
Landscaping expenses
Additional municipal fees or expenses (landscaping, trash removal, etc.)
Home decorating expenses
Utilities
Electricity
Heating
Water and sewer
Telephone
Cell phone
Internet access
Long-distance telephone
Cable TV
Household Consumables and Groceries
Takeout food
Health products and medicines
Cleaning products
Beauty aids
Dry cleaning
Transportation
Car payments
Car insurance
Car maintenance
Gas
Rental cars
Public transportation
Commuting costs
Predictable travel expenses (for annual family trips, vacations, etc.)
Essentials
Health care expenses
Pension contributions
Savings contributions
Mutual fund account contributions
Investment account contributions
Emergency fund
Entertainment
Dinners out
Club memberships
Movie and theater tickets
Video rentals and streaming
Tickets to sporting events
Vacation expenses
Child Care
Daycare
Tuition
Music lessons
Babysitters
Birthday party gifts
Student loans
School pictures
School activity fees
College savings accounts
Other
Charitable donations
Hair care
Hobby expenses
Gift expenses for:
birthdays
holidays
graduations
showers, weddings, etc.
Calculate the Difference Between What You Earn and What you Spend
Subtract your monthly costs from your monthly income. Use a highlighter to identify the necessary goods before comparing your income to your spending. This quick step will be helpful when searching for ways to save money. The balance remaining is what’s referred to as your monthly net income.
Get Your Spending in Line With Your Earnings
After adding up your monthly costs and comparing them to your monthly income, you will be left with two options, depending on the results.
If your spending exceeds your income, it's time to take action. Make a new column next to the one where you entered last year's costs for your current year's budget. The expenses that cannot be modified should be stated in the new column precisely as they are. If you pay real estate taxes with your mortgage and those taxes are likely to rise, you should try to adjust your mortgage to reflect this rise. Then you should closely examine the products you've concluded are unnecessary and see where you may make cuts. The aim is to develop a realistic plan for bringing your spending in line with your income.
You may consider an emergency fund, investments, retirement, and education planning accounts if your costs exceed your income. You may also look at unnecessary things and make cuts to accommodate these other accounts. You may also factor in an inflationary spike in specific products.
Establish an Emergency Fund
Most financial gurus recommend saving enough money for a six-month emergency fund in case you get disabled or lose your job. You do not have to start an emergency fund or worry if you do not have one. But, you may set up an account to function as an emergency fund and begin putting money into it. It is a solid start, even if you contribute only $10 monthly.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
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