I could have simply focused this post on how to create a budget, but that would not do justice to the importance of the task. That is because not only is a budget essential to keeping your finances under control, but it also gives you the ability to make calculated decisions about how to spend your income.
Unfortunately, most folks fail to understand the importance of establishing and maintaining a household budget. A recent survey found that 61 percent of Americans don’t have a household budget or have difficulty sticking to one. If I were a betting man, I would wager that a very large majority of those unfortunate Americans in the survey are under a significant amount of financial discomfort because they are clueless with respect to their household finances.
Every competent household CEO uses a budget to track his cash flow and manage his finances. A budget is not just a plan for your money. Your budget is a valuable tool that, when faithfully followed, helps track monthly expenses, control spending, set money aside for retirement and rainy days, and even save for vacations and other big-ticket purchases.
You can begin the actual task of establishing your budget by simply using this household audit worksheet. (Three asides here: 1. If you know how to use a spreadsheet such as Microsoft Excel, you may want to build one based upon the worksheet I have provided. I’ll talk more about the advantages of using spreadsheets in a later post; 2. You may also use one of the free home budget software tools available online; and 3. If you haven’t already done so, you may also want to read my previous post on collecting necessary household income and expense records.)
Let’s now go through the worksheet step by step:
Step 1. Break-out and record your monthly net household income. Remember, as part of your monthly net income, one item you will be recording is your net monthly paycheck total after tax withholding and other deductions are made. These “other deductions” could include 401(k) or other retirement deductions, health benefit deductions, garnishments, etc. There is no need to over-think this entry; simply put, your net paycheck is the amount of your check, or the amount auto-deposited into your bank account every pay period. Enter any other sources of income and total them up on the lines provided.
Step 2. Break-out and record your periodic expenses. These are expenses that only come up once or twice per year, as opposed to monthly. Good examples of periodic expenses include auto maintenance, tires for the car, educational expenses such as tuition and books, homeowner’s insurance and property taxes. Keep in mind that many people pay their homeowner’s insurance and property taxes on a monthly basis as part of their overall mortgage payment; if that is the case with you, do not include those payments as a periodic expense!
Step 3. When you are finished entering your periodic expenses total them up and then divide the amount by 12 to get a total monthly average.
Step 4. Categorize and record your expenses as either wants or needs. Based upon the receipts, checkbook register and other data you collected earlier, enter your monthly expenses on the second page of the worksheet. You’ll need to determine which of those expense items are necessities (needs) and which are discretionary (wants). For example, for most people, the rent/mortgage, electricity, sewer, and groceries are necessities, while car washes and restaurants are discretionary. In some cases, an item may be considered partly a “want” and partly a “need”. Here is a completed sample household audit worksheet. On page 2 of the sample, you will notice that for the Cable entry, the monthly bill of $200 was split equally between “wants” and “needs” on the decision that half of the total bill was a result of a special multi-sport “season pass”. There may be many other expenses where this logic could apply.
Step 5. Subtotal your total expenses for wants and needs. On page 2 of the sample form, you can see that expenses categorized as “needs” are $3300, while the “wants” are $2200.
Step 6. Compare your income and expenses. On page 1 of the sample worksheet, a comparison of all monthly expenses and net household income reveal a monthly household balance of negative $1500. The negative number indicates that the household is currently spending beyond its means. The household CEO’s goal is to create a household budget that reduces that number to zero.
However, before a budget can be properly established, a household strategic plan must be created. I’ll discuss how to do this in my next post.
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