Creating a Household Budget
by Jack Whitley with contributions from Dennis Doble and Alison Wilcox
Creating a household budget is an essential part of monitoring personal finances and can ensure that your money is being spent wisely. Working with clients, one of the things I have noticed is that most people I talk with don’t have a method for tracking where their money goes. When income is high, some people feel that their lifestyle has graduated from this exercise. I think the opposite. Because many people in higher income brackets wish to reach financial independence in their 50s, rather than 60s, budgeting and super saving is extremely important throughout the working years, affording one the luxury of early financial security and work flexibility.
For those without a current budget, starting one may seem like a daunting task, however, this article provides a basic guideline to get you started on your household budget construction. Budgeting is best done as a manual tracking exercise. Using a simple spreadsheet really makes one think about where the money goes month to month. Strive for each monthly sum to be net positive. For all the great ways a software such as Mint provides for tracking net worth, I think what is missed is the type of thinking that tracks changes in monthly spending. For instance, my water bill was $900 this quarter vs $250 normally…what’s going on there? or my credit card bill was $4k larger than normal this month. I think this type of tracking promotes good behavior and thought for prioritizing one’s spending. I can say this from experience because this is how I track my own family’s spending.
Here are some tips to get you on your way to better spending!
- List Your Income (Know What You Earn):
The first step to a successful budget construction is to list all sources of income that you will bring in each month. It is important to include any sources of income outside of your base salary (i.e., rental/investment income, pensions, child support payments), and that you deduct all applicable taxes and pre-paycheck contributions so that your income total accurately represents the money that you have available.
- Add Your Expenses (Know Where You Spend):
Next, you will want to know where all your money is going and will thus have to list all your expenses. Your expenses can be separated into fixed expenses, which will be the same every month (i.e., rent/mortgage payments, property taxes), and variable expenses, which will be different based on the amount that you use, purchase, or consume (i.e., electricity, water, other utilities). If you are unsure of what dollar amount to budget for some of your expenses, it can be very helpful to reference past bank or credit card statements and base your estimates off these figures. Also, it is important that all your expenses are recorded as a monthly amount, so divide all annual expenses by 12.
- Calculate Your Net Income (Difference Between What You Earn and Spend):
After you have defined and calculated all your sources of income and expenses, you will want to know your net income. Your net income is what you have left over after all your monthly expenses have been paid and will show you the difference between what you are earning and spending on a monthly basis. To calculate this number, simply add up all your monthly expenses and subtract it from your total income. Your net income will provide you with valuable information about your financial situation and is used to make decisions about what might be best for you moving forward.
- Getting Your Spending in Line with Your Earnings:
When comparing your monthly income to expenses, two different results are possible. If your expenses are greater than your income (negative net income), then you will need to take some sort of cost cutting measures, and this is usually done by limiting certain variable, non-essential expenses. If your expenses are less than your income (positive net income), then you may have some disposable income which you can then use to fund personal expenditures or build up a retirement/investment account.
Click here for a budgeting checklist to help you get started on your household budget.
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This article is intended to present you with a general outline for creating a household budget. As with any financial strategy, please do your own due diligence and talk with your advisor or CPA to determine what strategy is best for you.