Household Budgeting
A budget is the cornerstone of responsible financial planning. It shows exactly how much money you have and where it’s being spent. Just like it’s done in a business, a household budget can help you find ways to save money and plan for the future
Everyday, thousands of consumers face financial crises. These can be caused by personal or family illness, or loss of job, but the most common cause is overspending. By tracking your spending you will know exactly where your money is going.
Our society encourages consumers to "buy now, pay later", offering credit cards and convenience to spend more everywhere we look. This is why it is so easy to get carried away with spending, and eventually end up "knee-deep in debt". A budget is designed to help you gain control of your spending, and with proper planning it can help to improve your financial situation.
Household Budget Basics
Keeping Track:
- There is only so much money, and you only get paid certain amounts at certain times. The question is: where does it all go?
- A good portion of your money goes towards the basics: housing, food and basic living expenses. Another portion pays for transportation. But how much is left and where does it go? Finding those expenses and filtering out what isn’t actually needed is an important part of a household budget. You need to be able to track these small expenditures since they do indeed add up quickly.
Limit Spending:
- After completing a budget, you may find 5-10% of your total spending is for purchases that are not needed.
- 5-10% is a significant amount by any measure. Perhaps your future plans include buying your first home, going back to school, saving for your child's college, paying down debt or simply setting aside cash for a special trip. Wouldn’t it feel good to able to have money left over to cover these tangible things?
Discipline Yourself:
- Your goal is to rid yourself of instant gratification. (Impulse-buying is a top symptom of credit card misuse.) The budget sets guidelines on what and when items can be purchased, and is decided upon in the neutral environment of your home, not the busy cashier counter of a store.
Goal Setting:
- Budgeting supports your financial goals, which may include:
-
- saving for your first home
- paying down debt
- preparing to go back to school
- planning for retirement
A good budget adds these goals into the equation
Prepare for Emergencies:
- As much as you don’t want to think about it, If you were to lose your job, how long could you survive on available funds?
- If you had to stretch those funds, what reductions can you make in your existing monthly expenses?
- That is the key benefit of a budget. It helps prepare for emergencies with established expense reduction plans.
Making a Budget
The first rule: your budget "cash in-flows" needs to be greater than your budget "cash out-flows." (note: budget items are expressed in monthly terms.) Let’s now find out how much you make, and then we’ll break down your spending into categories for easy identification.
Make sure to include
all your income and expenditures you currently have in order to get a clear picture of your present financial situation. Removing the non-essentials to allow for savings is the next step in the budgeting process.
The following categories contain specific items you will need to have monthly dollar figures for, so look it over and prepare all financial data, including checks, statements and receipts to have the numbers to plug into Excel (or however you plan to calculate your budget).
Income:
How much money you bring home on a monthly basis? Income sources include:
- employment income
- alimony received
- investment income
- social security
- support payments
- savings
How much income should be allocated for the budget?
- your goal should be around 90-98% or less (The remaining 2-10% of your income gets allocated for savings)
Housing Expenses:
Housing expenses will likely be your largest expense item, especially if you own a home. Housing expenses include:
- your mortgage payment with escrow (taxes, insurance)
- monthly rental payment if you do not own
- utility services (electric, gas, oil, water, sewage, garbage, etc.)
- telephone, internet, cable
- house repairs and maintenance
How much for the budget?
- Usually, about 32-35% of income if you own; 15-20% if you rent
Living Expenses:
Common home living expenses include:
- food
- home supplies
- school and work lunches
- snacks, treats
- clothing
- education-related expenses
- home services (cleaning, gardening)
- postage, paper and home office supplies
How much for the budget?
Family and/or Personal Care:
Taking care of your family and yourself usually does—and should—rank high in importance. Expenses associated with include:
- family insurance (health, disability, life, dental, other care)
- doctor, dental, eye care, hospital visits
- prescriptions and over-the-counter medications
- child care
- elder care
- health clubs
- veterinarian expenses
How much for the budget?
- about 8-19% of income; 15-25% for full child/elder care services
Transportation:
Transportation expenses are more than just gas costs and car payments. Typical expenses are:
- auto loan payments
- auto insurance
- gas expenses
- maintenance and repairs
- taxes, licensing
- toll fees
- parking
- public transportation
How much for the budget?
Family Recreation:
One must take the occasional time to kick-back and do something fun, or take pleasure in a vice of choice. Recreation/entertainment expenses include:
- dining out
- movies out and rentals
- outside entertainment
- cigarettes/cigars, tobacco
- beer, wine, liquor
- birthdays and holidays
- vacation travel
- weekend, day trips
- gambling, lottery tickets
How much for the budget?
Business Expenses:
If you own a small business, you have a separate budget/financial plan for it of course, but if its expenses come out of pocket (i.e., out of your abovementioned income sources) then you of course have to work this in the budget. Typical expense categories are:
- deductible expenses
- non-deductible expenses
- agent/broker fees
Obligations:
Household (parental) obligations include:
- home equity line or loan payments
- credit card payments
- student loan payments
- personal loan payments
- alimony, child support payments
- judgment or liens
- other assessed taxes
- charitable donations
How much for the budget?
- about 18-28% of income (your goal is to reduce this percentage)
Savings:
Funds allocated to savings include:
- 401K contributions
- IRA contributions
- investments
- savings (personal, college, retirement)
How much for the budget?
- about 2-10% of income (your goal is to increase this percentage)
Setting Up the Actual Budget and Spending Plan
If you have all your income and expenses sorted and added up, in theory the next step is to simply subtract your expenses from your income and see how much is left. After that, you “trim the fat from the budget”— start removing all non-essential items one at a time and see how it affects the total for the end of the month or year. Keep doing it until you can reasonably reach your goal of having money left over to put toward investments, and paying off obligations, etc.(The objective is to save each month a percentage of your total income to achieve your short- and long-term financial goals.)
Note that fixed expenses (payments, bills, necessaries) cannot be adjusted by much. But flexible expenses (discretionary spending) can be reduced and in some cases eliminated as needed.
Once you budget is complete, you will know whether or not you need to begin the elimination process. This is not easy. No one likes to give things up. It is easy to go from economy to extravagance; it is hard to go from extravagance to economy. Go back to the age-old wants vs. needs question. Do you really need this expense or is it more of a want? Giving things up also allow you to stop the endless worry about how you will pay your bills.
Creating the maximum value out of what you have available financially is the essence of budgeting—peace of mind is worth more than expensive dinners.
Household Budget Worksheets in Excel and Online
Our free household budget Excel Worksheet
Here comes the fun part! There’s no need to reinvent the wheel and create your own excel spreadsheet for your budget (or heaven forbid, do it in pen and paper), as we have a neat little dynamic worksheet available for free download. There’s no macros or plug-ins, and it’s very easy to use.
Download household budget worksheet here
It’s intuitive and easy to use. It’s an excellent tool to help you get started creating a family/household budget. All common income/expense categories are already there, all you have to do is plug in your specific numbers (or estimate them) and it will give you your projected end balance for each month, and yearly figures. Insertion of rows or the renaming in cells is straightforward without any complicated formulas.
Dedicated personal finance software
Do you have multiple, variable income sources? Do you own a business? If you need greater control over your budget than our simple tool allows, you’re next and best option is to purchase complete personal/business finance software for your computer.
Surprisingly, even the best don’t cost too much: Intuit’s Quicken software (which has consistently received top ratings for years) will run you between $30 to $50, and it’s a complete budgeting and financial-planning tool. Click
here for a list and review of the best personal finance software available for 2009.
The greatest thing about personal finance software is the automation. For example, Quicken automatically keeps your budget up to date by importing account data from your bank, calculating interest and taxes, and even calculating your net worth based on the fluctuation of your stocks in the stock market! Also, say you make a purchase on a credit card or get your direct-deposit in your savings account from your employer—your Quicken budget will immediately be updated to reflect it. (These are just a few of the hundreds of options available.)