How do you control your home’s spending and achieve your financial goals? You need a household budget, of course. This is a summary comparing and tracking your income and expenses for a definite period, often a month. It sounds like starting a budget is about restricting your spending, but don’t worry, it doesn’t have to be that way.
In essence, having a household budget helps show you how much money you’re bringing in and compare that to your expenses. When you’re aware of your income and expenses, you can consciously control how much you spend. It eventually makes it easier to pay off your debt, and save more money.
Before learning how to create a budget, it’s a good idea to get to know about different budget systems first.
There are various types of budgeting methods that can help you manage your income. Learning about them helps you effectively make use of budgeting to the utmost in controlling your spending, paying off debt, and increasing your savings. The most common budgeting methods are:
This budget method is ideal if you are new to budgeting. It’s nice because it gives you room to pay down your debt while also covering your current costs and save for possible expenses. Basically, this budget splits your income into three categories – 50% for necessities, 30% for wants and 20% for debt repayment and savings.
This is simple enough for beginners, which helps you get into the habit of budgeting and knowing where your money goes. The best thing about this budget system is you still have funds for fun. It’s perfect for managing your money correctly while still living a fun, comfortable life.
If the 50/30/20 system is a bit too lax, you can try the envelope system. This is a rigid method that can help you reduce unnecessary spending. The difference with this budget system is you don’t really track every purchase because it is cash-based. Instead of tracking, you set up a spending limit for every category instead.
For instance, you set up allotted cash to be used only for purchasing groceries, which you put inside an envelope. Once you have spent all the money inside those envelopes, you can no longer spend any money on that category. The advantage of a cash-based method is you become less willing to spend money.
This is a reverse budget system designed so that your spending habits and values match. In this budget system, you first set aside a set amount from your monthly income for your savings, emergency funds, and debt. The rest of your income is to be used for bills and other costs, which means you don’t really need to input numbers.
By adopting the investor mentality through this method, you can quickly build up your retirement savings. It’s great because it eliminates the temptation of skipping on contribution and avoids using your funds on things other than savings. It’s a technique enough to be a golden rule of personal finance.
This is a budget suitable even if you are a meticulous planner or an overspender. Whichever type of budgeter you are, this system makes tracking your spending clear. The idea is to use every penny from your monthly income until not one is left. However, this doesn’t mean to use them all for a shopping spree.
Instead, you want every cent of your money to be spent with a purpose. In this budget, you deliberately use the money, whether it’s to buy groceries or save for a trip. After you’ve allotted money to all expenses, your budget should equal zero. It works with both cash method or electronic, but you must log in at every expense if it’s the latter.
So, these are the common budget systems you can use. Now, here is the step by step guide on how to create a household budget as you work on your financial goals.
Before you can start making a household budget, find a budget template or worksheet you can use first. You can look online for ready-made templates you can edit to fill in the numbers for your income and expenses. Or, you can go with the old-school pen and paper way.
There’s nothing wrong with going the old-fashioned way. However, a spreadsheet or a budgeting app is so much easier and accurate to use. Electronic tools usually already have designated fields for the income and expenses, other categories, and built-in formulas so you can budget with little effort.
Start your budget by gathering all your financial paperwork, which you will need to calculate your income. Some of the financial statements you will need are:
You will need information about your income and expenses so that you can create a monthly average. If you can get more information about your finances – all kinds of statements regarding your funds – it will be easier to make an accurate budget to manage your money.
Once you have all the financial statements you can get, you can begin calculating your income. For a regular paycheck, you can use the take-home pay as your income. You can also add other sources of income like a pension or child support. If you’re self-employed, use the amount left after paying taxes.
If you have a seasonal or a freelance job, you might have a variable income. In that case, you may use the income you had on last year’s lowest-earning moment as the baseline. But in most cases, you should just include reliable sources of income. List them all, and then add the numbers – the result is your total monthly income.
Next, it is time to calculate your monthly expenses. Write down all expenses you expect to have in a month. The list of expenses will often include:
You can look at your receipts, previous bank statements and credit card statements to have an idea of all your spending. By reviewing your spending, you can learn some of your expenses don’t occur every month. Knowing about them will make it easier to afford such expenses when they are finally due.
As mentioned before, not all expenses occur each month. Those are called variable expenses, while those you need to pay every month are fixed expenses. They are mandatory expenses you often have to pay each time in the same amount. Examples of fixed expenses are mortgage payments or rent or regular childcare.
If you plan to pay off a part of your debt or save a fixed amount each month, include those in the fixed expenses. Any essential spending that usually stays the same amount every month is included in this category. Just like before, check your previous bank statements, credit card statements, and receipts for this.
As for the variable expenses, which are the type of expenses that usually change every month, typical examples include the utilities, groceries, gasoline, and other items. Besides fixed and variable expenses, you may also have a category “surprise expenses,” where you can put money to afford things that could derail your budget.
After identifying all your expenses, you can begin assigning the spending value for every category. Start at the fixed expenses, imputing the exact amount. For the variable expenses, you can input an estimate of how much you will need for each. You can also look at the last three months’ expenses to get a rough estimate.
Now that you have all the information you need, time to take those and input them on the spreadsheet, ledger, or budget software you plan to use. GuardianWealth free budget planner offers you a simple and efficient way to start budgeting and track your expenses. Add all the categories and totals you’ve made into your chosen budgeting tool. Tally them all, and you will see your household budget finally taking shape.
Next up is to total your net income. All you need to do is subtract your expenses from the total of your monthly income. The result of this is your net income, which is the money left over after you have paid all your expenses for the month. A positive net income means you were doing good in managing your money.
If you notice from the beginning that your income is higher than your expenses, that’s already a good thing. It means you have extra money to use for other categories of your budget such as paying off debt, emergency funds or retirement savings. It’s a good indication that you aren’t living from paycheck to paycheck.
After adding up the total of all your expenses per category and the net income, you want to evaluate it. Take a look at your spending habits and see if you have spent way over what you can. An excellent way to get a better idea of how much of your money goes somewhere is by putting it in percentage.
Use your net income to divide the total spending for every category, then multiply by 100%. Did you spend too much eating out last month? Were you saving enough? Were you able to pay off a bit of your debt? Compare the results to your financial goals and see if you’ve been doing well.
You will see how much you have spent over the last month and how much you need to achieve your goals. When assessing your spending habits, it’s a good idea to look at these areas:
Check if you’ve been going overboard on spending in these areas.
The second last step to creating a household budget is making adjustments if you have higher expenses than your income. Say that your expenses are $500 more than your monthly paycheck plus other incomes. In that case, you should check your variable expenses to see which items you can cut costs to account for the $500 overspend.
It could mean adjusting how much you spend on your groceries, eating out, streaming subscriptions, etc. Check every variable expense with costs that you may reduce and regularly make adjustments to avoid falling into debt. You can do this, or you can look for more sources of income.
On the other hand, you may use your income leftover to add to your emergency fund or increase your savings. But if you want, you can also use the extra money to treat yourself like traveling or dining out. It’s not a bad thing to enjoy luxury or spend on non-essential things from time to time.
The last step to creating a budget is to stick to it. It is crucial to hold yourself accountable for every purchase you make and every money you spend. You don’t have to reduce your spending if you’ve been managing your income well. But if you have to, try to search online for budgeting and saving tips that can help you.
Creating a budget and sticking to it will be challenging at first. But when you get used to it, you will see a big difference in your finances. Also, GuardianWealth’s free budget planner can help you achieve this; you can set spending limits and be notified when your spending is about to exceed your target. It greatly helps in ensuring you don’t end up with debt and wasting money on unnecessary things. The key is to have financial goals and use those as a guide on using your income.