Taking Inventory of Your Personal Finances: How Do I Start a Household Budget?
Plan your household budget together to help eliminate surprises.
However hard it may be to believe, "budget" is not a dirty word. A budget isn't supposed to be a set of handcuffs to keep you from enjoying life. A properly designed budget actually helps you get more out of life by allowing you to control your money, rather than letting your money control you. Setting up a household budget isn't complicated, but it will take some time and attention to detail.
Assess Cash Flow
Every household budget needs a starting point. Financial gurus refer to it as your cash flow, but it's really understanding where your money comes from and where it goes. Using your personal finance software system, you can record your regular income and outgoing personal expenses. Include with your income your regular monthly salary or wages, and don't forget such things as investment and savings income. Your expenses include both your regular monthly bills, such as your mortgage or rent payment, the electric bill, cable, cell phone, credit cards and auto insurance, plus your living expenses, such as food, clothing and gasoline. If you have more money leftover at the end of the month, you have discretionary income that you can use for entertainment, to invest, for vacation expenses or anything else you want. If you have more expenses than money at the end of the month, you have negative cash flow, and you probably need to make some adjustments.
Track Your Spending Patterns
Your monthly bills aren't the only things you spend money on. Before you can control your money, you need to have an idea of what your current spending patterns are. Mark Noel, a Certified Public Accountant based in Smyrna, Tennessee, recommends tracking your spending for a month before you even try to create a budget. A personal finance software system can help you record your monthly spending. "Include all of your purchases and expenditures for the month by date and amount along with a brief description," Noel encourages. "That simple exercise can help you realize how much money you spend on things you might otherwise miss, like your morning drive-thru coffee, or money in the parking meter."
Categorize Your Spending
Once you've tracked your spending for a month, it's time to categorize your spending. Organize your spending into categories such as housing, utilities, transportation, groceries and household items, clothing, health care, insurance, entertainment, eating out and others, Noel suggests.
Create Your Budget
Develop your monthly household budget using the information you've gained tracking your cash flow and spending habits. "Start with the necessities; housing, utilities, food and transportation expenses," Noel advises, "then work your way down from the most essential to the least essential categories. Since you've tracked your spending for a month, you should have a pretty good idea of what you really spend in each category."
Prepare to Make Adjustments
Once your budget is in place, be prepared for some trial and error. Continue tracking your expenses and you'll see how you actually spend your money, as opposed to how you think you spend your money. "Don't worry if you don't hit your budget exactly," Noel says. "You just need to make some adjustments." Maybe you'll discover you're spending too much money eating out, or you might have underestimated how much gas money you actually need. Chances are you won't get your budget 100 percent right the first month, or the second or third month. "Think of your budget is a work in progress," he adds. "Each month, you'll get better until you eventually get control of your money."