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Woman using a laptop computer to create a household budget

How To Make A Household Budget

Woman using a laptop computer to create a household budget

If you need help keeping track of your finances, you’re not alone. Plenty of people want more in-depth insights into how they spend and manage their money, but unfortunately, financial planning isn’t always widely taught. For individuals and families who want to set and achieve financial goals, some knowledge of their household finances is a must.

In this article, we’ll cover household budgeting, how to properly calculate income and expenses, and the steps you can take to reach your long-term financial goals when it comes to saving for the future.

Calculate Your Income

The first step to creating a realistic budget is calculating your income. The more accurately you’re able to determine how much money you’re bringing in each month, the more solid your budget will be.

A common mistake many people make when determining their income is calculating the gross amount rather than the net amount. Instead of adding up your hourly wages or dividing your listed salary into 12-month increments, calculate your net income. Your net income is the sum you’re actually paid each month with taxes and other deductions already subtracted.

Review the paychecks you’ve received for the past six months to come up with a fair estimate of your monthly income. Add the net amounts from each paycheck, then divide that sum by the number of paychecks you’re reviewing. This will calculate an average pay amount per pay period. If you’re paid twice a month, multiply that total by two for a monthly income average.

Perform the same calculations for your partner’s income if you’re part of a two-income household.

Additionally, if you receive nonemployment income such as child support, military benefits, installments from a settlement, or side-job income, add those averages to your income list.

If you receive any short-term sources of income, you’ll want to avoid including them in your income calculations in most circumstances. However, there are times when it’s okay to include short-term income. For example, if you’re going to receive regular payments for a year and you’re only filling out a budget worksheet for that year, you can include the short-term income.

List Your Expenses

After documenting how much money your household receives each month, you’ll want to list all of the bills you pay on a regular basis. Common household expenses include:

Don’t forget about variable expenses, like quarterly taxes, premiums that are due every six months, or services that are billed annually. If you’re having trouble thinking of all the payments you make throughout the year, review your bank and credit card statements and make a note of what each outgoing sum went to.

If you’re creating a monthly budget and you want to factor in quarterly, twice-yearly, or annual bills, divide quarterly bills by 3, twice-yearly bills by 6, and annual bills by 12.

Here’s an example: If you pay for car insurance on a 6-month schedule, and the total comes out to $552, divide the sum by 6. You’ll get $92, which is how much your car insurance is going to cost you per month.

Note: Don’t forget about expenses that crop up without much of a second thought, like eating out during your lunch break at work. While these expenses are easy to wave off for a single purchase, they’ll add up if they’re part of your regular schedule.

Deduct Totals

Once you’ve combined the totals from each source of your monthly income and the totals for all of your monthly expenses, subtract your expense total from your income total.

Let’s say you bring home about $3,800 monthly and your spouse earns $3,100 monthly. That comes out to $6,900 in total net income each month.

Let’s also assume that your monthly expenses total just under $4,600 (always remember to budget based on the high end of your average monthly costs).

If you subtract your expenses from your income, that will leave you with $2,300 at the end of the month that you don’t have to spend on bills.

Monitor Your Spending

Now that you have a few estimates written down (please write them down, this is an important part of the budgeting process), you’ll want to test your calculations.

Keep a close eye on your spending for the next couple of months. Follow your standard spending habits without intentionally increasing or decreasing the amount of money you earn or spend. After 2-3 months, review your bank and credit card statements again and compare the deposits and withdrawals (including cash withdrawals at the ATM) against the sums listed in your budget.

If everything adds up, you’ve created a realistic household budget. Should you run into any discrepancies,  take some time to carefully review your statements and the budget you’ve created. Highlight any expense you didn’t factor into your budget, then determine the source of these unexpected costs.

If you find that the budgetary discrepancies come from unique one-time purchases, you’re probably not going to need to factor them into your regular expenses. However, if you discover that you’re making similar purchases on a somewhat consistent basis, you should include them as an expense or find a way to avoid them in the future.

Example: A single purchase to replace a blown tire would be a one-time expense that likely won’t come up again in the near future. Don’t add it to your budget.

But, six single purchases at a hobby store over a three-month period should either be added to your budget or avoided in the near future (if you’re trying to save, that is).

Once you’ve reevaluated your budget and made adjustments based on your discovery, you should have a more accurate snapshot of your monthly earnings versus your monthly spending.

Repeat this process again until your written budget and your current finances more or less add up. You don’t have to match every cent, but if you’re within range of what you’re planning, you can consider your planning effective.

Budgeting isn’t always a task you can complete in an hour, because you might need to examine your figures a couple of times, make adjustments, and keep a close eye on where your money is going. While a general draft of your budget is relatively simple, ensuring its accuracy takes time and effort.

Set Savings Goals

If you’re budgeting in an effort to save money or pay off debts, you can set savings goals once you’re satisfied with the accuracy of your budget spreadsheet.

With a reliable budget, you can develop a solid payment schedule to reduce your debts and in doing so, you’ll be able to estimate how long it will take to free yourself from the specific debts you’re addressing.

For individuals and households with no significant debts to pay off, you’re free to set one or more savings goals for the future. You might decide to save up for a future vacation, emergency fund, the down payment for a home, a new vehicle, or even retirement.

Save Realistically

Saving money is a great idea, but it’s important to set realistic goals and expectations when putting funds away. For example, you may have $2,300 left after you pay your bills, but assuming that you’re going to save every cent of it isn’t always practical.

Expenses come up and even if you have an airtight household budget in place, you’re probably going to have times when you want to buy something you didn’t plan for. If this new expense will prove beneficial and it won’t interfere with your ability to meet your family’s needs, it’s normal to consider making the purchase. To prepare for these situations, it’s a good idea to have cash on-hand or leftover money in your checking account, which isn’t possible if you save everything you don’t absolutely need to spend.

To save money realistically, plan on saving half of the money you have left over each month. If you have $2,300 sitting in your bank account one month, put $1,150 of it into your savings account.

Keep an eye on your checking account as you go and if you find that most of the $1,150 left stays in your account month after month, consider it a sign that you can reasonably save a little more if you’d like. You might decide to save ⅔ of the money you have left over each month instead of half of it.

Creating a household budget might sound like an intimidating process at first, but if you document all of your finances, monitor your spending, and set realistic expectations for your money management behaviors, it’ll become easier as you go.

Stay tuned for more financial tips and advice. If you found this article informative, consider sharing it with your friends, family members, and colleagues if they’d benefit from learning how to create a household budget.


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