While keeping on budget can be an issue for many American consumers, many are operating their homes entirely without a financial plan. It is possible to get by sans spending framework. However, running even a single-person household like this long-term typically leads to overspend – resulting in bad spending habits and debt.
But having a budget doesn’t mean you have to cut out the lattes and nights out with friends. Because it is a lot harder to change habits and stick to plans when they don’t bring joy – no matter how fiscally responsible it may seem.
Here are five (5) easy steps to building a workable budget for your household.
Identify your goals
Everyone has a different reason for managing their spend. So, sit down with the key players in your home (furry friends allowed), and decide about what you want to work toward or avoid. Some examples of common financial goals include:
Paying off debt – Most Americans have some debt on the books such as credit card, student loans, car loans, or personal loans. A popular way of tackling this particular goal is to create the “debt snowball” popularized by financial adviser Dave Ramsey.
The idea is to focus efforts on paying off the lowest balance items first while paying minimum payments on everything else. Then, once the first item is paid off, add the amount you were paying to the now eliminated item to the minimum being you are already paying on the next debt item until everything is paid off.
Creating a healthy emergency fund – Pulling together a viable emergency fund as a buffer to those “life has happened” moments is an integral part of financial independence and well-being. However, the recommendation of 3-to-6 months’ worth of expenses can be a lofty goal.
Those looking to generate an emergency fund should keep a total dollar amount and timeline in mind. While a final goal may be to reach the recommended emergency fund allotment, it is okay to start smaller such $500 - $1000. Even that much could cover a car repair without completely throwing your finances off track.
Preparing for retirement – Financial experts agree retirement savings should come first. Even if you have debt or lack an emergency fund, look into the retirement savings options available to you such as an employer 401K, or traditional and Roth IRA providers.
Once you have determined your current goal, pull together your required expenditures. These include rent or mortgage, utilities, loan repayments, and any minimum payment requirements for existing credit card debt. Remember to cover any yearly and other non-monthly expenses such as property taxes, insurance, or trash pick-up. Divide these non-monthly expenses out into monthly portions, so you are not blind-sided by an additional cost when they do come due.
Other expenses can be variable, such as groceries or transportation. Calculate those at the maximum amount you can expect to spend.
Remember to think about the little things that make life happier for you and your family. What items or activities do you need to keep in the budget to help you stay on track? Whether this is taco Tuesday, poker night, or the occasional visit to the ice cream shop, list each as a line item and attach a cost.
Account for Seasonal Changes
Monthly expenditures can fluctuate based on the time of year. Households with children may see an increase in expenses for the beginning of the school year. Most consumers spend additional money around holidays and birthdays for both food and gifts. Considering these seasonal changes and including them in your expenses can help insulate you from financial stress with the added benefit of knowing exactly how much you have available to spend as events happen.
Income Versus Expenses
Now you know your total expenditures, it is time to compare the outgoing funds to incoming cash flow. Gather your bank statements or pay stubs for a minimum of the past ninety (90) to determine total amount of reliable income. Do not count money attained from hobbies or outside jobs on which you cannot depend. Individuals who have fluctuating incomes should use an average of their monthly earnings over the past few months.
Subtract your total monthly expenses from your monthly income and make a note of the result. This remainder is the amount of money you have available to apply to your stated goal. If the answer is negative, revisit your monthly expenses to see if there are adjustments you can make to reconcile the difference. Changes could include consolidating debt, canceling unused memberships, or looking into less expensive modes of transportation.
However, reducing expenses is not always about squeezing the bottom line. Simple changes in habit can also help reduce expenses such as:
- Reduce water bills by shortening the time in the shower, watering the lawn less often, or adjusting toilet tank water levels.
- Increased use of your local library can provide access to books, video games, and movies without the expense of making a new purchase.
- Planning meals for the week can keep you from too many visits to the grocery or convenience store where you may be tempted to spend extra money. Bonus: Busy schedules can benefit from slow cooker meals.
Create Your Budget
With a clear idea of your complete cash flow, goals, and strategies in mind, begin dividing your monthly income into separate chunks allocated to each of your outgoing items. Some of the most common categories include:
If your goals include building an emergency fund, saving for a holiday, working toward a large purchase, or preparing for retirement, include those as individual items in your allocations. It is at this point where you will allocate funds from the net income you calculated earlier.
Every household’s budget will be different. However, working toward goals and focusing on changing habits rather than tightening belts can make financial plans more achievable for everyone.