HOW TO CREATE A HOUSEHOLD BUDGET THAT WORKS
HOW TO CREATE A HOUSEHOLD BUDGET THAT WORKS
I have found that there is no “one size fits all” budgeting style. Money is a very touchy subject, and personality has a lot to do with what budget “type” will work best for your household. You will learn a lot about yourself and your views about money as you go through this process.
In the simplest of terms, a budget is a list of your expenses vs. your income. When you sit down to start a budget, it can seem overwhelming but do not give up! I will lay out how we did it step by step. Remember that the first step always appears to be the hardest!
Some of the biggest reasons why all households should want to create a budget are:
- Budgets reduce overspending
- Budgets help end fights about money for couples
- Budgets help to break the paycheck-to-paycheck cycle
- Budgets help you get out of debt
- Budgets help you stay on track toward achieving your financial goals, including retirement.
Like anything that will succeed, you need to have someone who is on point to make sure you are moving in the right direction. In our household, I love numbers and spreadsheets, my wife not so much. I am the designated money manager of the house. My wife only wants to know if we can afford something, and if not, when can we buy it. You have to work as a team to meet your financial goals and, at the same time, satisfy all of your wants. A budget is not about controlling one person or the other; it is about working together to buy back your time as a couple. Imagine if you did not have to go to work anymore because you have enough money saved and invested to replace your work income? Having a budget can help get you there.
BUDGETS REDUCE OVERSPENDING.
The number one reason couples get divorced is money. It is not about having too much money; it is about having more month than money! Once we completed our initial budget, we decided how much each of us can spend per month without consulting the other. This money we can use to buy whatever we want. We each have a “spending account” some funds get moved as paychecks get deposited, all the accounts are linked, and either one of us can see exactly where the household money is going. It is essential to have full transparency.
BREAK THE PAYCHECK-TO-PAYCHECK CYCLE.
If you are continually running out of money before the end of the month, it is because you are overspending. You are spending more money than you make. If you do not fix this, it will lead to more debt, which eventually crushes you financially. When you take the time to sit down and see where you are spending money, you will rethink what you are spending your money on. The problem is not that we spend $500 every month on one item, but cumulatively we might be spending an extra $500 or more between eating out, snacks, drinks with friends, shopping when bored on Amazon, etc., per month!
BUDGETS HELP YOU GET OUT OF DEBT.
If you know how much money you make and how much money you need for necessities, you also know how much money you can spend without getting further into debt. If you already have some debt, make sure to add this as an expense when you do your budget. As you pay off your debt entirely on one credit card or loan, reward yourself. The way we did this was that we took the following month’s payment that would have gone to pay that credit card or loan and instead spent it on ourselves. We did this every time we completely paid off a credit card as an incentive to keep going. It is always important to reward yourself as you hit your goals.
ACHIEVE YOUR FINANCIAL GOALS.
What is the one thing we all want? Have you ever thought about why it is that you go to work? I believe that it is to “buy” control of our time. We save money and invest it to help us have a secure retirement. In this way, we buy control of our time. A budget can help you grow your savings, retirement accounts, or help you achieve any other financial goal you might set for yourself.
According to many surveys, only a third of US households spend and live by a budget. A study done by Money.com found that just over 30% of people over 30 years old and only over 20% of the people over 40 years old were on track to meet Retirement Savings Benchmarks! It is interesting to note that 1/3 of the US Households stick to a budget, and just 30% of 30-year-olds are on track to meet their respective Retirement Savings Benchmarks. I believe that this is not a coincidence. For older people, usually, in our 40’s, we have kids going to college. Many choose to reduce the amount of money put into retirement accounts and redirect this money towards their kids’ college costs. While I disagree with this, I understand why people do it.
If you have never created a budget, you need to see where the money is going, and the only way to do this is to build a budget by hand. Once you have done a few months of budgeting “by hand,” you should be able to use an app because only then will you understand what the app is showing you.
Steps to CREATE YOUR HOUSEHOLD BUDGET
Step 1
You need all of your credit card and bank statements printed out for the past three months. When you have them, start making a list of the expenses that appear on your statements on a spreadsheet. Depending on how detailed you want to get, you can list the expenses under the store name, which requires more work in my experience, or list them under their category, which I prefer. For example, you could put down Starbucks, Chick-Fil-A, McDonalds, or include them all in the “Fast Food Category.” A budget is simply the list of all of your monthly expenses. This will take most households the better part of a day between getting copies of all credit card statements and bank statements and creating the list. You can see an example of our budget here.
For fluctuating expenses, like electricity, gas, water, that change depending on household usage during the year, I recommend one of two things:
- Go back 12 months and use the highest amount paid.
- Take an average of the last 12 months and use this amount.
In our case, we use the highest amount paid to avoid any surprises. This means that our payment is lower in the months we use less electricity, helping build a buffer for future months.
Step 2
Once you have the list of expenses, add your household income. Is this greater than your total expenses or less than your total expenses? How much money is leftover? This difference between total expenses and total income is an eye-opener for most people. At this point, many households begin to go back over the items they spend their money on to see what can be eliminated. Go for it! Check to see what subscriptions you have that you are not using, or worse yet, still paying for and forgot!
Step 3
Review your budget. In our experience, it usually takes three to four months to have all of your expenses in your budget spreadsheet. I recommend that one of you review your budget at least monthly, especially when you are starting. The best time to review your budget is when you get paid because you still have time to adjust your spending until the following paycheck.
Step 4
Use one card to pay for all variable expenses, such as shopping, subscriptions, etc. Shopping this way will help you keep track of everything and make it easier to stay on top of your spending. Remember that all a budget is meant to do is keep you from having “more month than money.” Spending on one card makes it easier to see how much money you have spent.
What are the DIFFERENT TYPES OF BUDGETS?
When you start looking for information about creating budgets, you find budgets with names like; Zero Budget, 50/30/20, Savings First, Debt First, and countless other names. It may seem that there are many different types of budgets, but this is not the case; it is just different ways to get to the same destination or goal.
The desired result for any of the “different” budgets is the same; to make you aware of where your money is going! If you have never created a budget, you need to see where the money is going, and the only way to do this is to build a budget by hand. Once you have done a few months of budgeting “by hand,” you should be able to use an app because only then will you understand what the app is showing you.
Zero Budget
The idea behind a “Zero Budget” is that you end the month with a balance of zero after all the expenses are paid. We found this to be the most challenging budget for our household because we always had something come up during the month when you have three kids.
50/30/20
The idea behind this type of budget is that you spend 50% of your take-home income on necessities, 30% on wants, and 20% on savings and debt repayments. I tried this initially, but since I focused on paying off debt, I had shifted the numbers and targetted to use 30% of our take-home pay for tackling debt.
Savings First
As the name implies, this type of budgeting focuses on growing your savings. The best way I have found to explain it is you treat your savings as an “expense.” Many experts agree that you should have between 6 and 8 months of income saved. This budget focus is a great way to achieve that goal.
Debt First
After reading “Savings First,” you probably know what this type of budget is focused on. We began with this type of budget because we wanted to eliminate our debt as fast as possible. We prioritized always paying as much as possible towards our credit card and loan debt. We were always looking for ways to reduce our interest expense by aggressively using balance transfer offers. It is better to pay a 3% fee to move a balance and be interest-free for 18 to 24 months than to pay 15 -25% per year and leave the balance on the current credit paying the higher interest rate.
The best way to use balance transfers is only to move balances to cards with zero balance. If none of your credit cards are emailing you about balance transfer offers, there are several things that you can do:
1. Pay off the balance on the card with the lowest balance, and this will trigger a balance transfer offer in most cases. If you do not want to wait or already have a zero balance card, you can call that credit card company and ask what offers they have if you move a balance from another card. They usually will have some promotion going on. We usually asked for the longest time so that we had the most flexibility.
2. Open a new credit card for the sole purpose of moving over a balance from another credit card company, then cut up this new card when you receive it! Many cards offer Balance Transfer offers when you open a new credit card, take advantage of this ONLY if you have the discipline not use the card for purchases!
Consolidate your balances to make it easier to stay on top of them and play what I call “the balance transfer game.” The average American household has four open credit cards. If you can consolidate your total debt on to one or two cards, leave the other with zero balance. As the balances get paid down and close to ending the promotional period, be ready to move your balance to the other cards. You want to do this about a week before the promotion period expires because balance transfers take time to process. The key is not to carry any of these cards because new purchases get charged the full interest! Promotional interest rates only apply usually to transferred balances. This “balance transfer game,” as I call it, can save you a lot of money!
Survival Budget
This is the type of budget I recommend for business owners. First, you need to have a clear idea of how much you spend every month on just the necessities like food, shelter, transportation, insurance, etc. Everything else is considered non-essential. This budget will show you the absolute minimum you can live on if times get tough or you decide to start a business. This is the budget type for business owners because it helps them know how much money is the absolute minimum they need to generate as income to cover the essentials.