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Creating a household budget involves tracking expenses for a few weeks, categorizing them, and subtracting them from income. This helps identify areas for cuts or expansion and can aid in reducing debt or saving for emergencies. Continuously tracking spending and periodically reviewing the budget is important.
A household budget is a way to keep your spending in line with the amount of money you have to spend, and it can be helpful in understanding which areas of your budget could use some cuts or expansion. It starts with two very simple things: knowing how much you earn and how much you spend. When you start creating a household budget, it can actually be an eye opener to discover how much you actually spend and exactly where the money is going, and it’s often this knowledge that can help you inform your spending in the future.
It is not very meaningful to make a household budget without first having an idea of what you usually spend. A first step is to spend a couple of weeks to a month tracking all your expenses. You can usually list standard expenses like rent, car payments, utility payments, and the like, since these can vary or change very little. Subtract these amounts from your take-home income.
For the time you keep track of your standard expenses, keep a notebook handy and give yourself 10-15 minutes a night to record all expenses. Count everything you spend, from ballet classes to trips to the grocery store for lettuce. Include birthday gifts, gas money, and money for extras like dining out and going to the movies or renting DVDs. You’ll want to keep a running total of what you spend and where you spend it, so consider having categories like: Gifts, Education, Groceries, Entertainment, and Dining Out. Alternatively, use a computer program like Quicken, which will help you set up these categories and do the math for you.
After you’ve looked at your monthly expenses, you’ll want to see where you might be spending too much or too little so you can create a household budget. For example, you may not want to reduce your grocery store quantities greatly because those are typically things you need to have. On the other hand, if 10-20% of your income is used for dining out, you may decide to limit dining in the future to reduce expenses. However, when possible, don’t limit all luxuries or entertainment, but help yourself to a reasonable amount of gifts without wasting resources.
A household budget can also be helpful if you want to reduce existing debt. You can redirect some of your excess funds to pay more than the minimum balance on credit cards, or you can alternatively see if there is any money left over that can be saved for future emergencies. For the most part, however, the household budget answers the question of where the money goes, and if you continuously track and stay within the budget, you will know the answer to this question.
There are online budget calculators that can help, and books dedicated to this topic. However, from a simple perspective, you can determine what expenses you have, where you can cut expenses, and where you should invest most of your funds. Once you’ve established a budget, continue to track spending because you know you’re staying within budget, and periodically review the budget to see if rising costs are changing the way your budget works.
Smart Asset.
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