If your approach to budgeting has been to “wing it” then there’s a good chance you’ve found yourself in a tight a time or two. Budgeting doesn’t have to be complicated. And having a workable home budget is one of the best things you can do to improve your finances. Here are the steps to building a home budget that works as hard as you do.
Often people don’t sit down to develop a home budget because they’re not sure where to start. The whole process sounds complicated and people tend to think that budgets are boring documents that don’t work anyway.
Actually, building a home budget isn’t complicated at all.
Determine you income to start building a home budget
The first step to building a home budget is to figure out exactly how much money you have coming in every month. This is your income.
It’s possible that there will be some estimation here, especially if you work on commission or if tips make up a big part of your income. What you’ll want to do is look over your income for the past several months to get a good idea of what you can expect each month. This it not the time to be idealistic because idealistic is frequently unrealistic.
However, if you work a traditional job then you may know precisely how much you have coming in each month. In that case your income is the easy part.
If you’re lucky enough to receive annual bonuses from your job, the smartest financial move you can make is to put the money into savings or an investment account so that it can grow for you. Ideally, you won’t spend this money since you don’t see it very often anyway.
What are your expenses?
The next category you need to think about is your expenses. Actually, this part of the home budget will be made up of several broad categories such as utilities, food, entertainment, etc. Getting too specific here may just make the process harder than it needs to be.
You’ll probably have to do some estimating here. You may not know every single month exactly what your electric bill is going to be. But by looking over your records for the past year you can get a pretty good idea of the highs and lows so that you can build a home budget that allows you to pay for the higher months.
You’ll want to account for all of the spending that you do and list out these categories. Don’t forget debt payment, charitable giving, buying gifts, and personal grooming.
Don’t forget expenses that occur infrequently!
An area that often gets people into trouble are those that don’t come around every month. The more infrequent expenses often catch us by surprise…and unprepared…if we haven’t accounted and planned for them.
Make a list of bills that come around on a more infrequent basis. For example, we pay our car insurance twice a year. But this is a pretty big bill that we plan for. Since I have a good idea how much it will cost each year, I’ve divided the total yearly bill by twelve and each month I move that amount into our savings account. That way I’ve got the money ready every six months when the bill comes due. If I didn’t do this, I’d be scrambling to find the money and I’d be a very stressed woman.
The same goes with gift giving. I know that I’m going to have to buy gifts for a certain number of birthdays and I know how many people I’m buying for at Christmas time. I can estimate how much I’m going to spend per person for each occasion and set that amount of money aside so that I don’t end up adding these expenses to my credit cards.
So think about those yearly expenses and list them out. Don’t forget things like vacations, school tuition, medical co-pays and premiums, and vehicle maintenance, inspections, and car tags. I can’t tell you how many times during the early years that a new set of tires created a budget disaster.
Track your actual expenses
In order to get the best numbers possible, I suggest that you track every expense you make for several months. If you think you spend $500 a month at the grocery store, then track it. Write down every time you make a food purchase so that you have the most accurate numbers possible. Sometimes we’re surprised that our estimates are off and tracking them is the only way to know if we’re on target or not.
Basic home budgeting principles
When building a home budget there are some basic principles you need to keep in mind. Here are some of them.
- Distinguish between wants and needs. This can be a hard one for lots of people but it’s critical if you want to build a home budget that functions properly. Beware of convincing yourself that a want is a need when it isn’t – you may just be trying to find an excuse to purchase something you don’t really have to have. Real needs are things like clothes, food, and shelter; but designer clothes, gourmet food, and a big, fancy house are more like wants!
- Expenses should not exceed income. You may be surprised the first time you sit down to build a home budget and discover that you actually don’t make enough money to cover your expenses. If you discover this, you need to look carefully at your income to see where you can increase it, and look just as carefully at your expenses and see where you can make cuts.