How to Build a Budget for Your Household
Procrastinating on budgeting when it hangs on your to do list? With LendingArch advice you'll make it happen!Get started
By Lindsay VanSomeren
You know you need to budget but yet you don’t where to start. It may even feel like a strict parent is nagging you to do your homework.
If this rings true to you, we have good news for you: budgeting doesn’t have to be as difficult as it sounds.
After all, it’s a journey. And just like any journey, the most difficult part of budgeting is taking the first steps to build your budget. After that, there are many options for tracking your budget (including some that are automatic.)
Read on to learn how to build your household budget. Well, go on, start reading. What are you waiting for?
Step One: Tally Up Your Income
In order to build your budget, first you need to know how much money you have to spend. This is the most important number.
You can spend less than this and allocate the rest towards savings, but you can’t go over. If you do, you’ll risk going into debt.
For most people, this is a straightforward process. All you have to do is tally up your monthly take-home pay, along with any extra earnings such as side hustle income.
If you have a stable job, start by looking at what is deposited into your bank account each month. If you’re self-employed or get irregular paychecks, try to take the average for the last three months (or even a year, if your income fluctuates according to the season).
Step Two: Tally Up Your Expenses
One of the biggest reasons why budgets fail is because it’s easy to set unrealistic expectations.
Sure, you might want to set your dining out budget to $25 per month. But if you’ve actually been spending $500 per month going out to eat, then your budget will probably last about as long as a snowflake on a hot summer day.
Instead, it’s better to get a baseline idea of how much you actually spend – right now.
One of the easiest ways to do this is by gathering up a few months’ worth of past bank statements and/or credit card receipts. Then, tally up how much you spent in certain categories, like gas for your car, food (both at restaurants and at the supermarket) and debt payments.
If you don’t have bank or credit card statements to rely on, you can also do things old school by carrying around a small notebook when you’re out and about. Each time you spend money, write down that amount in your notebook.
The idea here is to come up with an estimate of how much you spend in each budget category per month. This way you’ll have a realistic number to base your budget on.
Step Three: Set Your Goals
A budget can help you plan for your day-to-day costs, but what it’s really useful for is helping you plan your future. Of course, to do this, you need to know where you’re going.
You can’t go on an awesome road trip without knowing where you’re headed.
So, let’s find out.
There are a few goals that everyone should be saving for, such as emergencies and retirement. But the rest? The sky’s the limit (or, at least your budgeting skills and income are).
Try this: make a list of all the things you’d like to buy or do someday. Don’t hold back. Vacationing for a month in Maui? Buying a swanky townhouse?
How about having all the fanciest new equipment for your favorite hobby?
If you have a significant other, this is a good exercise to do with him or her as well. Each of you can write your own separate list. When you’re done, try comparing the lists to see what’s most important to you both.
Next up: try picking one to three priorities on your list. If you spread yourself too thin, it’s unlikely you’ll make much progress towards any of your goals. By picking just the most important ones, you’ll make it easier on your wallet to save.
Remember: you can always change your mind later.
Step Four: Draft a Budget
Now that you’ve got a good idea of how you’re already spending money and what things are most important to you, it’s time to put everything together. Yep, that’s right: we’re going to create a budget.
First, we’ll make a list of categories. Many of these you’ve probably already used earlier when you listed out your monthly expenses. Use whatever categories fit your situation best, but here are a few ideas for starters:
- Utilities (electricity, water, Internet, cable, cell phone)
- Insurance (car, life, renters/homeowners)
- Debt payments
- Fun money/entertainment
- Household goods
- Gym/other memberships
- Dining out
- Savings (retirement, vacation, house down payment, Christmas fund, etc.)
Next, write down how much you spend on your needs first: things like housing, food (groceries only — nothing fancy here) and transportation The idea is that this is the money you need to spend, and can’t cut back on.
After that, tally up how much you have left over from your take-home pay. Your task now is to divvy that amount up between all the other categories.
It’s helpful to look over your past spending patterns when you do this. This way you’ll set realistic expectations.
As you go along, subtract how much money you have left from your take-home pay. Chances are you won’t have enough money for everything.
That’s totally normal, so don’t worry! But, you will need to make some hard decisions. For example, you may have to shuffle money away from one category to another to fit your priorities.
What about non-monthly expenses?
Some expenses, like your rent/mortgage or Internet bill are probably the same every month. These are easy expenses to plan for.
But what about an insurance bill that’s only paid once every six or twelve months? Or what about your electricity bill that may vary from month to month? Fear not! There are ways to estimate these amounts as well.
For bills that are the same amount each time you pay them (like your insurance bill), simply divide the total bill payment by how many months are in-between billings. For example, if you owe $400 for car insurance every six months, you’d need to set aside $66.67 per month.
For bills that vary month-to-month, it can be helpful to average out past bills. This may be tricky for electrical bills that are higher in the winter than the summer. It can be useful to look back at your average cost over the past year.
Step Five: Set Up a Budget Tracking System
So, you’ve got your budget all set. Great job! Now we need to find a way to track your spending.
There are tons of different options for this. Some budget apps sync with your bank account and are almost completely automatic.
There are also others, like You Need a Budget (YNAB) that allow you to download and import your bank statements into the program.
You can also use a spreadsheet or continue with the notebook method, writing everything down.
Whatever you do, it’s a good idea to experiment with different programs to see what works best for you. Don’t be afraid to switch up your budgeting methods, or even change the monetary allocations in each category from month to month.
After all, your budget is a living document and should change as your needs change.
By following these tips, you’ll be well on your way to building a successful household budget. Over time, you may discover that this become almost second nature.
After all, a budget is just a tool for you to tell your money where to go. This sure beats wondering what happened to all your hard-earned cash, right?