Creating a Budget for your Home
Household Budget Basics
Creating a household budget can be a skill that’s difficult to master, and it can be even harder to implement in today’s reality of ample credit and thoughtless spending. But the statistics clearly illustrate the necessity of learning this vital skill: bankruptcy rates and household debt have reached epic proportions. These problems can have a devastating effect on the long-term goals of many people, such as planning for a comfortable retirement or owning a home. But no matter how dire your current financial situation may seem, learning the art of budgeting can be a powerful tool in evaluating income and expenses and ultimately solving your money woes.
Credit Card Debt
One of the major pitfalls to maintaining healthy finances is the rampant use of credit cards to pay off bills or to borrow money. It is becoming increasingly common for Americans to simply use their credit cards for cash advances instead of taking out a personal loan from their bank. The frequency of this phenomenon and the ease with which it can be done are becoming major roadblocks on the path to financial security for many families and individuals. Often people can only afford to make the minimum payments on their credit cards, meaning in actuality they are only paying off the interest accumulated by the purchase or cash advance, and are truly never paying down their actual debt. It can become a vicious cycle, and one that is hard to escape.
Creating a Household Budget
Creating a budget can seem like a daunting task, but that’s only because it’s not a skill that most people have not been taught. If you find yourself participating in the vicious cycle of falling behind on your monthly bills, and then using credit to pay for them, learning to create and stick to a budget is the first and most important step in regaining your financial security.
The basic tenet of a successful household budget and a financially secure household is simply this: household income must be greater than household expenses. But how is an effective household budget created? Follow the simple steps below to find out.
Pay Yourself First: This golden rule is heard time and time again, yet so few people actually follow it. People tend to live, and spend, for the moment. But saving a percentage of your income each month to save for long-term goals is a financial must. Decide on an amount of money that you can comfortably set aside into a savings account so that you will have an emergency fund, money for a down payment on a house or car, and ultimately, your retirement.
Download or Print out a Budget Template: A budget template is a powerful tool. It can shed light on exactly how much money you have, where it is coming from, and more importantly where it is going. You can even create one yourself, but there are ample free resources on the internet you can use for a basic template.
Figure out Your True Monthly Income: This includes more than just your monthly salary or paycheck. Also be aware of any monetary gifts you receive, work bonuses, stock dividends, and any interest you may be accumulating from savings accounts. Income tax returns can also be included in this section. The point of the exercise is to figure out exactly how much money is coming into the household.
Write Down Mandatory Expenses: These types of expenses are the ones that can’t be avoided: mortgages or rent payments, automobile loans and insurance, utility bills, health care costs, local taxes and property taxes, and grocery money. Write each amount down on your budget sheet, and don’t forget the Pay Yourself First rule. Think of saving money each month as a mandatory expense that is as essential as paying your mortgage, even if you can only afford to set aside a small amount of money at first.
Write Down Discretionary Expenses: These types of expenses are the little luxuries of day-to-day spending, and this is the area in your budget where you’ll be able to make many changes to improve your financial situation. Discretionary expenses include movie theater tickets, going out for dinner, unnecessary shopping trips, and even your morning cappuccino on the way to work. Some find it helpful to keep track of their discretionary spending for a few days or a week before writing these numbers down. Or you can examine your credit card statements and online banking activity if you don’t use primarily make purchases with credit or debit cards. After you do, look long and hard at where your money is going after your mandatory expenses have been taken care of. This area is where you can make important changes: for example, bringing lunch to work instead of eating lunch out every day.
Income – Expenses = Savings: After you’ve added together you discretionary and mandatory expenses, figure out this little math formula. Hopefully you’ll at least have a balanced budget. If you’re in the negative, you have a deficit in your budget, and it’s time to review your budget template and see where you can start cutting back. If you have a positive number in your household savings, then you have surplus money. This is a sign of a good budget, but many people choose to cut back a little and save even more after reviewing their finances on paper.
Continue Evaluating Your Budget: Keep reviewing your income and expenditures each month. You can learn a lot about your spending and savings habits, and that knowledge is invaluable if you are committed to living a healthy financial life. Each month that you continue to track your expenses, you should get a clearer idea of where you need to cut back, and where you are on track in your household budget.
Additional Resources: Below are additional resources about household budgeting, debt relief, credit information, retirement planning, saving money and much more.