Personal Finance 101: How to Create a Household Budget

Depending on how disciplined you are, a budget may not be essential to keeping your finances under control, but it does allow you to make calculated decisions about how to spend your income.

Many competent household CEOs use a budget to control spending, and help them save for retirement, emergencies, vacations and other big-ticket purchases.

To begin the actual task of establishing your budget you’ll need to establish your income and outgo — so the first step is to collect your bills and income records.

Let’s now go through the worksheet step by 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. Identify any other sources of income, and then record the data. I prefer to use a spreadsheet, but there are other options including online budgeting tools, and even good a old-fashioned paper and pencil.
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!
3. Total up your expenses. When you’re finished entering your periodic expenses total them up and then divide the amount by 12 to get a total monthly average.
4. Record the rest of your household expenses and categorize everything as a want or need. Based upon the receipts, checkbook register and other data you collected earlier, total up your monthly expenses on a 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.” After you’re finished, add up your expenses in both categories (wants and needs).
5. Compare your income and expenses. If your monthly expenses exceed your net household income, then your household is spending beyond its means. Remember, the household CEO’s goal is to create a household budget that ensures the household outgo does not exceed its income. Take a look at all of the items in your “wants” category — those are the items where you will need to cut back on your spending in order to balance your books.

Although preparing and tracking a family budget requires elementary accounting skills, it’s natural for some to be uncomfortable with the process. If you lack the skills — or simply would prefer a little help in getting started — consider contacting a professional accountingfirm of qualified accountants.

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