Whatever your financial goals may be, whether you’re wanting to be able to save more money, make more money, invest more money, etc, you really need to start by taking a look at your current spending habits to figure out where all of your Money is going.
In our household we are parents to two adorable toddler boys who keep us more than busy, we both work more than one job (you can read our full story here),
So I know everyone can relate to me when I say, we work hard to earn a living!
In order to make the most out of our hard earned money, we should make sure we spend the money we bring home wisely.
Well guys, that’s where a household budget comes in. It’s a good tool to see at a glance what we have coming in, what’s going out (and what that money is paying for) and if there’s anything left at the end of the month to put into savings.
Before we dive into exactly what a budget can do for us, let’s consider for a minute what will happen if we’re not tracking income and expenses. We may end up spending more than we’re making in a given month (or two, or three). Over time that can put us into some pretty hot water financially. We may also spend a lot more than we’d like to believe on things like eating out, going to the movies or new clothes.
Having a budget gives us more control over where we want to really spend our hard earned cash. Maybe that’s dinner and a movie, but maybe it isn’t. Wouldn’t it be nice to have an actual choice?
In this article I will be talking about:
- Why it is necessary to have a household budget, and
- How to set up a household budget.
Why You Need To Keep A Household Budget
It Tracks Where Your Money Is Going
A budget simply tracks your money. You record where the money comes from each month (your income) and then write out everything you spend it on, starting with your regular monthly bills like mortgage or rent, car payments, utility bills etc. What’s left after all the bills are paid is your discretional income.
Helps You Identify Things You Waste Money On
Having it all in front of you in black and white helps you identify things you’re wasting your money on.
It makes you reconsider if you really want to spend well over $200 a month on Cable TV or $150 on your large cell phone plan. Or how about that yearly magazine subscription to something you no longer read? Go through your expenses and reevaluate if this is REALLY how you want to spend your pay check.
Allows You To Be Proactive About Savings
Saving money without a budget is hard. We go in with the best of intentions at the beginning of the month, but somehow there isn’t anything left at the end of the month.
A budget gives you a chance to be a bit more proactive. Set aside some money for savings at the beginning of the month, even if it’s just $20. Put it in the budget as a regular expense, just like you do with your other urgent bills. If you need to, open a separate savings account so you’re not tempted to spend it.
Ensures You’re Not Spending More Than You’re Making
Most importantly, your budget will keep you on track and help you make sure you’re not spending more than you’re making. And I don’t have to tell you that that’s pretty important for your financial wellbeing.
How to Set Up a Household Monthly Budget
Ok, so now that I have gone over why a monthly budget is necessary, the next step is to actually create a monthly budget.
The type of budget I will be discussing with you is a Zero Based Budgeting System, meaning Every Single Dollar coming in has a function. At the end of the month the amount of income brought in minus ALL expenses equals Zero.
I know that sounds a little scary, but trust me, this budgeting system really works because it not only includes your daily living expenses, but it also includes your savings and investments as well!
So, without further ado, let’s go over the 7 steps on how to create a monthly budget!
1. Figure out Your Monthly Income
The first step in creating your budget is to write down the total amount of income you will be bringing home this month. This includes regular pay, bonuses, cash gifts, alimony, child support, commissions, etc.
If you are paid by salary, then you have a pretty good idea of the amount of income you will be bringing home.
If you are paid hourly, then your pay is more irregular. Estimate the total amount you will bring home, and then you might need to adjust the actual income brought home as you’re paid.
2. Calculate Your Fixed Monthly Expenses
The second step in creating a monthly budget is writing down all of your fixed monthly expenses.
Fixed monthly expenses include all of your monthly expenses that don’t change, meaning you have these same expenses every month.
These can include Rent, Mortgage, gas, debt, groceries, utility bills, any health insurance premiums that you pay monthly, etc.
3. Figure up any Irregular/Seasonal Expenses
The third step is to figure up any seasonal or irregular expenses that come up throughout the year. These expenses can include taxes (if you pay in to the IRS, local/state, or school taxes quarterly), Real Estate Taxes, annual membership fees, school fees, medical bills, etc.
Since seasonal expenses don’t occur monthly, it could be helpful to estimate the total amount due for each expense and divide it up monthly. That way you know each month you should set aside X amount of dollars for each seasonal expense so you have the money saved up when they come due.
4. Create and Set Financial Goals that you would like to Accomplish
This step is VERY important and is KEY to successfully reaching any financial goal that you set.
Some examples of these goals could be:
- I would like to invest X amount of dollars into my retirement fund each month.
- save at least 3-6 months worth of monthly expenses and put into savings.
- I would like to put X amount of dollars towards my debt each month.
- Save X amount of dollars for a down payment on a House.
- Save X amount of dollars for a down payment on a new Car.
It is extremely important that this step is done BEFORE deciding how much money you have left over each month to spend on eating out, clothes, entertainment, etc.
5. Adjustable Monthly Expenses
Ok guys, after knowing what you will be bringing home this month, knowing your monthly expenses and your financial goals, you know if you will have any money left over for the fun things in life!
At this point when making your monthly budget, if you have any money left over you can decide what you to spend on your discretionary or adjustable expenses.
These expenses are NOT necessities, and they can include going out to dinner, entertainment, etc.
6. Subtract Your Total Monthly Income and Your Total Monthly Expenses
At this point in making your budget you have calculated your total monthly income, and you now know your total monthly expenses (fixed, seasonal, goals, adjustable).
Take the Income, and then subtract the total expenses. The number should be zero.
If the number is not zero, but it is a positive number, you can readjust and add more into savings, etc, if you would like. Some people feel better knowing they have a tiny bit extra left over each month!
If the number you come up with is negative, then you need to figure out a way to either make extra money to cover all of your expenses, or you need to adjust your expenses and see where you could be saving more money each month.
And just like that guys, you have completed your monthly household budget!!!!
Congratulations!!!!
However, we’re not totally completed yet, because if you remember from earlier, I said there were 7 steps, and we just finished step 6!
Don’t worry though, this last step though it is VERY important, it’s not too difficult.
7. Track Your Spending
The seventh and final step in creating your monthly budget is to track your spending.
Every month your finances may be a little different, but adjust as needed, and ALWAYS keep your financial goals in mind!
There are a lot of apps out there that are free to help you track your spending, like the Every Dollar App. I also know that if you bank with Huntington, they have a spending analysis on the hub that helps your track all of your finances.
