If you're not sure where all your money goes, then it may be time for you to create a household budget. A budget is an important tool for keeping your finances in order and monitoring expenses. Here are some tips on how to develop your own household budget:
Calculate your monthly income. Most people know how much money they make per year, but that number can be misleading. When developing your budget, you need to calculate your monthly take-home pay (the amount after all of your taxes and other deductions are removed). Besides your monthly take-home pay, be sure to list any extra income you receive from bonuses, commissions, investments, child support and other sources.
List your monthly expenses. Make a chart to list all of your monthly expenses. Include everything -- even gas for your car and miscellaneous expenses such as birthday gifts and co-pays for doctor's appointments. If possible, make your chart on a computer spreadsheet using a program like Excel -- that way, you can easily track your expenses each month. This helpful site has a number of possible budget spreadsheets.
Here are some items that you should include on your monthly expense chart:
- Money toward savings -- you should always pay yourself first.
- Mortgage or rent payment.
- Insurance (automotive, homeowners, rental and medical insurance premiums).
- Taxes not already deducted from your paycheck.
- Utilities like electricity, gas, water, and telephone.
- Cell phone.
- Cable or satellite TV.
- Internet fees.
- Loans such as car loans, home equity loans, and student loan payments.
- Credit cards.
- Child care expenses.
- School tuition.
- Medical co-pays and prescriptions.
- Car expenses like fuel and maintenance.
- Church or charity donations.
- Entertainment such as dining out and movies.
- Miscellaneous expenses of vacations, clothing, gifts, etc.
Add up your expenses. Once you have completed your list, add up the total (once again, if working in a spreadsheet, you can easily put in a formula to calculate your totals). If you're on the right track, your total monthly expenses should be less than your total monthly income. If that's not the case, you need to lower your expenses or find a way to bring in more income. Keeping track of this total (of income versus expenses) is part of the budgeting process. It needs to be done from time to time to make sure you're staying within your monthly household budget. Some of your expenses will be fixed (mortgage, rent, etc.) and some will vary (groceries, gas, gifts). Once you track these expenses over a few months, you can average them out in your overall budget plan.
Emergency funds. Learning how to set up a budget means planning for the unexpected as well. After your monthly expenses are calculated, remaining money can be put into an emergency fund. Because we can't plan every expense, it is important that you have an emergency fund for unexpected scenarios (like a sudden car repair). This should be a fund that is separate from your savings account, so that it can be tapped if needed. Ideally it should be built up until it covers six months of your household expenses.
More about paying yourself first. Most people have to add up monthly expenses before figuring out what remains to put into savings, but that's really not the best way to plan. If your employer offers a 401-K plan, you may want to contribute the maximum amount to that fund. That way, the money will be deducted from your paycheck and you won't even miss it. But 401-K plans are all about saving for your future after retirement, so you should still have a separate savings account as well.
What to do about quarterly or yearly expenses. You may have some bills that don't come on a monthly basis. If that's the case, you should set aside the money for these expenses every month anyway, so you're not hit with a big amount once the bill is due. There is nothing wrong with having multiple savings or checking accounts if you find it difficult to "separate" this money from your monthly bill money.
Envelope budgeting. If you're finding it hard to stick to your budget, try this method. The envelope budget method involves paying many of your expenses in cash that you have put aside in envelopes organized by spending category. After determining your expenses, you put cash in an envelope for each allotted expense. If you spend about $150 a week on food, you put that amount of cash in the “food” envelope, for example. Once the envelope is empty you don't spend any more in that category. Certain bills like mortgage, rent or utilities may be best paid by check or online, but others work well with this method. There are several online “envelope” systems as well.
Other budget and money management tips:
- Watch those daily expenses. Coffee, newspapers and trips to the vending machine add up and can really put your budget out of whack. Give yourself a weekly spending allowance and stick to it -- otherwise you may come up short at the end of the month.
- Consider writing down all of your expenditures for a couple of weeks -- you will be amazed at how much money you spend in a day. Make a conscious effort to cut back on unnecessary items and pay more toward your debts.