Most adults have never been taught how to balance a checkbook, much less plan a household budget. And yet, knowing where money is coming and going is essential to keeping your household financially solvent. If you don’t have a clear concept of your income and expenses, you can easily find yourself spending more than you earn and digging yourself deeper into debt by the day.
However, the average budget isn’t as cut and dry as a column for earnings and one for expenses. You likely have financial obligations that include unknown costs, making it difficult to plan and while most households feature one or two incomes, there may be other forms of money coming in on a regular basis or infrequently.
Creating a realistic budget for your household can be a complex undertaking to say the least. But if you want to keep yourself out of debt and even set yourself up for future success, financially speaking, it’s imperative that you put in the time and effort to craft and implement a workable budget. Here are just a few guidelines to help you meet your goals.
Pool Monthly Receipts.
The place to start is by taking a good, hard look at what you’re actually spending. You probably have a pretty good handle on your income and even if you’re not a salaried worker, you can likely calculate your average earnings by month or by year.
What you might not be entirely aware of is just how much you’re spending. You can start with the easy stuff: your monthly household bills for mortgage, utilities, car payments, and so on. From there it gets a little harder. What are you spending on groceries, eating out, or your morning cup of coffee? What about costs for fuel and parking? And there are always extras like clothing and other retail items.
Here’s an experiment to try. For one month, save every single receipt and keep a running tally of any and all cash expenses, from the five bucks you give your kid to the quarters you put in the parking meter.
At the end of the month, add up all of your expenditures and compare them to what you earned. If you’ve overspent this month, chances are you’ve done the same (or worse) in the past. And now you know why you can’t pay off your credit card – and that’s not even accounting for the interest you’re paying on past purchases.
Compare Income and Expenses
Now that you have a clearer picture of what you’re spending you can start to put together a more realistic household budget. You’ll want to begin with two columns: one for known income and one for monthly recurring expenses. The income column should be pretty simple since most homes feature only one or two incomes.
You may also have money from social security, an annuity of some sort, or other sources, and you likely have potential income like stocks and bonds, but for the moment, set these aside and focus on the steady income from your job.
Next, list out expenses that are more or less stable, such as your mortgage payment, utilities, and phone, cable, and internet. Using past receipts you can probably set aside a budget for food, fuel, and other essentials, as well. And don’t forget to break out annual payments like insurance into monthly increments so that you can plan for them accordingly. Now you have your basic budget in place.
You’ll find that once you’ve completed your budget, you will most likely have other expenses.
For example, when you planned your grocery budget, you may not have accounted for the money you spend dining out. You also probably didn’t list entertainment amongst your monthly bills, but if you like to go to movies on the weekends, you could be spending $20-$50 that you didn’t budget for.
If you’re careful, you should have some spending money left over when you pay all your bills, but you need to prioritize spending to make sure you’re not going over budget with the items you haven’t accounted for on paper. This is most easily done by setting aside a cash stipend for weekly treats like eating out or going to the movies. When the cash is gone, you need to stop spending.
Plan for Future Costs.
It’s all well and good to put together a budget that allows you to pay your monthly household bills and come out with a little extra spending cash in your pocket, but it may not be entirely realistic.
Before you blow your overflow on fun, you need to think about future expenses. If you were smart, you budgeted for known annual expenses like insurance payments, property tax, and medical and dental check-ups, breaking them out into monthly increments.
But what will you do if you end up needing a root canal or a false tooth? What if you’re the cause of a car accident and you have unanticipated medical expenses and car repair costs? In addition, you should think about sending your kids to college and planning for your retirement.
It’s a lot to consider, especially when you don’t know what the costs are going to be, or if you’ll even face such expenditures. The point is that you need to make saving for unknown future expenses part of your budget if you don’t want to wind up in debt down the line. Granted, these costs may not be included in your average household budget, but if you fail to plan for them, they’ll certainly impact your monthly payment plan when they pop up.
Find Ways to Save
You may find yourself in the unfortunate position of owing more money monthly than you earn, and this likely has something to do with credit card debt.
If this is the case, the best thing you can do to get your budget in check is to tighten the belt, lock up your credit cards, find ways to save, and start paying down your debt (by the way, this will likely improve your credit score in the process).
This could also mean giving up the movie channels on your cable plan, brown bagging your lunch instead of eating out with co-workers, cutting back on your wireless data usage, addressing your shopping addiction, and of course, waiting for sales and using coupons.
The household budget you create is only as good as your dedication to following it but you can always find ways to live within your means and resolve your debts when you take the time to budget accordingly.
So if you’re looking for the peace of mind that comes with paying all your bills and having a rainy day fund on the side, start creating and implementing a realistic household budget post haste.