A household budget is necessary for anyone looking to stabilize their expenses and avoid running into debt. It is as simple as that. The only problem is that household economy can be a fairly complex thing, with many expenses, ingoing and outgoings and, unfortunately, the occasional surprise bill or financial shortfall. Yet as true as that may be, avoiding making a household budget is a sure-fire way to get into financial bother the moment something unexpected happens or you hit a patch of bad luck. In other words, everybody – no matter their financial situation – should have a household budget, for it is one of the things that can take the stress out of one of the most potentially stressful areas of modern life.
A Simple Principle
And living by a household budget will not just preserve your financial solvency, but it could also help you grow your finances over time. For, like all budgets, the essential principle behind it is spending less money than you make. That simple principle alone ensures that you make money rather than lose it. However, the realization of that principle as an effective budget that tracks the myriad household expenses and possible contingencies can be somewhat more complicated. And despite the simplicity of that principle, many of us are actually pretty unsure about what a household budget is and what it isn’t.
One of the major misunderstandings is that many people believe that the solution to money woes is actually making more money. This is a myth and ignores the essential principle of any budget – the solution to money woes is always living within your means, spending less than you make. Without this key idea firmly in mind, making more money will simply lead to spending more and ultimately landing in the same position as before. There is also the prevalent erroneous idea that balancing your checkbook will achieve the same thing as an effective budget. This too is false because a balanced checkbook cannot prepare you for unexpected expenses and shortfalls.But a budget can.
Essential Rules of Thumb
Ideally, your budget should be as detailed as possible. The more detailed it is, in fact, then the more effective it can be. There is a myth surrounding this idea that a budget therefore limits your freedom of choice by accounting for every little thing and thereby leaving no leeway for spending your money spontaneously. If you are laboring under this misapprehension, then keep in mind that if you do not control your money, then it will control you. Nobody is suggesting that a budget needs to explicitly define the allowed expenditure for every last item.It’s not like you’ll have a distinct part of your budget devoted to things like a packet of chips from the gas station on the way home from work or a hand snow plough that you decide to buy during an unseasonably cold winter. However, there should be a part of the budget that can cover such contingent costs, without defining precisely what they will be. This is one of the essential budgeting rules of thumb.
More essential rules include the identification of important goals that you would like to achieve and which require money to do so. This can be any number of things, from a new car to a new home or simply a higher bank balance that you would like to achieve in future. Without such goals your budget will be literally aimless. Another essential rule is that spending should be ranked from priority to trivial and it also must include a net income from which you subtract expenses. It should also allow you to adjust planned spending and consider additional income.
Essential Steps to Creating a Household Budget
With all of that in mind then, it is time to get down to specifics of creating a household budget. These can be conceptualized as a series of steps. Follow these in order and you should be well on your way to creating an effective household budget that allows you to control your money – rather than have it control you.
As mentioned, identifying goals should be the foundation of your budget. But what does this mean in a practical sense?A goal gives your budget meaning, something to work towards. A goal will then allow you to prioritize expenses and dictate how much you should allow yourself to spend every month – but for this you will also need a timescale and a date upon which you would like to meet the goal.
For example, if you would like to accumulate a certain amount which is necessary to achieve your goal by a certain date, then it suddenly becomes clear how much you should put away each month in order to do so. Subtract your necessary expenses from your income and it will become clear how much you have left to spend each month. If this doesn’t make your planned date feasible, then you will need to extend it – or find a way to make more money.
It is also a great idea to report your progress towards your goals to a third party. A recent study at the Dominican University of Northern California reported that budgets have a whopping 71% greater likelihood of succeeding if this is done.
Record Expenses First
By recording your expenses first, instead of your income, you can see how much you need to meet them, rather than first of all considering how much you have available to spend. If you take this latter approach, then it is more likely you will deplete your extra resources just because you have calculated that you can afford to do so. Do things the other way around, and you will end up with more money at the end of the month.
Then Record Your Earnings (And Create a Contingencies Fund)
The most important thing to do when you record your earnings is to always use your net income and not your gross income. If your expenses are already recorded, then this should be easy. This will give you a much clearer idea of how much money you actually have spare every month while still hitting your targets. It is from this figure then that you can set aside a proportion for contingencies.
Calculate How to Live Within Your Means
Once the contingencies fund (which will allow you to cover unexpected costs) has been set aside, you will finally have the two figures – your planned spending and your projected income – that will allow you to see what state your finances are really in. By subtracting the former from the latter, you should aim for a figure of over $0. If you can achieve this magic number, then it will allow you to do the one thing that budgeting is really all about – relax!