You might know very well where your money goes every month. But even the most careful spenders and savers can benefit from budgeting. How do you create a household budget that will help you reach your money goals?
I asked the same thing, and my answer became the free Master Your Money — Get Your Budget On! course. You can check out the course, or keep reading for a quick step-by-step guide on how to create a household budget.
1. Get a Budget Worksheet or Excel Sheet
Budgeting tools, like worksheets or software, can make your life so much easier. Your worksheets make your budget easy to read and ensure nothing has gone overlooked. I offer a free Excel budgeting worksheet as part of my free Financial Downloads package. Or, you can create your own worksheet or Excel file from scratch, if that’s how you roll.
2. List All Sources of Income
Your income sets the tone for your household budget. You need to know how much money comes in each month so you can figure out how much you should be spending. Make a list of all your income sources, such as:
- Your main source of income, after taxes,
- Side hustle income
- Child support
- Social security
- Food stamps
- Other forms of cash welfare
Only include income that you can regularly count on each month. Credit card bonuses or cash you get from hobbies shouldn’t count if it’s not consistent.
3. List All Household Bills
Now for the not-so-fun part: seeing who’s claiming all your hard-earned money each month. Make a list of all of your bills—the set expenses you pay each month. Examples include:
- Rent or mortgage
- Trash pickup
- Child support
- Credit card debt
- Student loan debt
- Medical bills
Some of these expenses will be fixed each month. Others might vary. For budgeting purposes, estimate these expenses to the best of your ability. With the current inflation rate, you may consider padding each of these with a little extra cash.
4. Check for Any Additional Expenses
Go through your credit card statements to see if you’ve left off any expenses that don’t fit into your household bills. This might include any subscriptions, such as Netflix, food spent on takeout, travel, gym memberships, clothes shopping, or any other money-grabbers.
If you’re looking to cut back on spending, charges in this category are a good place to start. For instance, you might decide to cut the cord in favor of a cheaper streaming service. Or you might do away with a gym membership, shop for second-hand clothing, or postpone your annual vacation.
5. Divide Expenses into Spending Categories
Once you have a better idea of how you spend your money, start placing them in spending categories. For example, you might have one category for entertainment, which includes streaming services, events, non-essential takeout, and hobbies. Here’s a sample breakdown of your household budget:
- Housing (e.g., rent or mortgage, HOA fees, property taxes, insurance, etc.)
- Food (e.g., groceries, school lunches, snacks, etc.)
- Transportation (e.g., Uber fees, gas, car payments, insurance, parking fees, tolls, etc.).
- Utilities (e.g., power, water, internet, cell phone, etc.)
- Health and wellness (e.g., health insurance, medical expenses, prescriptions, gym membership, etc.)
- Personal spending (e.g., clothes, shoes, makeup, haircuts, school field trips, gifts, etc.)
- Entertainment (as mentioned earlier).
Thinking about your expenses in terms of categories can help you better visualize each of your expenses and how much you need to spend on each of them.
6. Allocate Funds to Each Category
Some expense categories are more flexible than others. For instance, you might be able to make your clothes last another month, but you certainly can’t put off paying rent without creating a bigger problem.
Start with your fixed expenses and the bills you can’t do without. Subtract those amounts from your income, then allocate what’s left over to your other categories.
For your flexible expenses, you might not need to use the same dollar amount each month. For example, you might budget more for personal spending during the holidays because of buying gifts for family and friends, but you wouldn’t need to spend that much every month.
One rule of thumb is to use the 50/30/20 approach to budgeting, where 50% of your funds go to needs, 30% go to wants, and 20% go to financial goals, such as savings or getting out of debt.
However, this isn’t feasible for many families who live paycheck to paycheck and have to use almost all of their income to pay for their needs. If this is the case, you might focus on ways to boost your income, slash your expenses, or both.
7. Track Your Income and Spending Each Month
The real key to making a household budget work for the long term is to track your progress. Review your spending each month to see how it changes and to account for new expenses incurred or debts paid off. You’ll also want to check in on your money on a more frequent basis to make sure you’re staying on track with the budget you created. Accidentally overspending in one area can create a domino-chain effect in other areas, which can eventually derail your entire budget.
Ready to Start Mastering Your Money? Check out my *FREE* Master Your Money-Get Your Budget On course.