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A household budget is a great tool for tracking your monthly expenses and income – and planning for the future. Besides helping you get organized, it also allows you to focus on two important things: how much money you have in the bank and how much your bills cost you each month.
The basics involved with setting a realistic budget are straightforward: How much money do you have and how much do you spend? A big first step is figuring out your monthly expenses. With a good budget, at the end of each month you can compare the list of your expenses with your income and decide where to spend extra money.
Those extra funds could go toward a number of things: a night in with the kiddos, a night out with pizza and a movie, a new car, a fun vacation – the sky’s the limit! You could even build your emergency fund to prepare for an unplanned expense, such as a new water heater or busted pipe.
Thinking of all the things you spend money on will take some work, but don’t get frustrated if it doesn't all happen in a single sitting! We’re here to help you take first steps.
Start by making a list of the money you spend (and what you spend it on), keeping in mind that the number is likely to vary from month to month. If possible, review all your bills from the past year to assist you in adding up the most accurate numbers possible. The more information you can include, the more likely you are to have a realistic picture of your actual expenses.
If you can find your expenses for a full year, add up those totals and divide by 12 to average out your costs. It’s understandable if you don’t have a full year’s worth of expenses. If you only have three months’ worth of bills, for example, you can still average out those costs by adding the totals and dividing by three.
If you don’t keep monthly bills handy, sign on to your online bank account and check your monthly statements. You’ll be able track what you’ve paid for with your debit card, as well as any paper checks you’ve written. Here are some examples of important expenses to track:
These are costs that stay the same, such as rent or mortgage payments, car payments, student loans and your cable bill. (These costs don’t necessarily have to occur on a monthly basis.)
These are bills you have to pay monthly, but the totals can vary. Examples include gas, electric, water and phone bills, as well credit card payments.
This category includes things like fuel for your car, groceries and entertainment costs like going out to eat, having drinks with friends, watching a movie or traveling.
Expenses here are miscellaneous things such as clothes, gifts for birthdays and holidays, medical co-pays or prescriptions, printer ink or cash you might spend on other non-regular purchases.
You should also set aside money each month for unexpected expenses, such as emergency medical bills or car repairs. Though there is no specific number for this, it’s always better to be safe than sorry and budget this category liberally.
Best practices include always having at least an extra $1,000 to $2,000 in the bank, setting aside 10% of your income each month or giving yourself a cushion of at least six times your average monthly expenses. In other words, be prepared.
While banks can loan you money to cover big expenses, remember that you’ll still have to pay that loan back with interest. Attempting to spend only what you can afford is one of the prime considerations when developing a household budget. When you know how much money you have, you’ll know how much you can afford to spend – and what you can save for emergency funds.
After you create a household budget and get in the habit of recording your monthly expenses and income, there is another important step: reviewing your budget and adjusting as necessary.
At the end of each month, check the total amount of your income and expenses. Are they in line with what you expected? Do they fall within your budget? While you can – and should – make budget adjustments each month as necessary, make sure you also take a look at your spending and income at the end of each quarter so you can set new, accurate goals for the coming year.
Ultimately, your goal should always be to spend less than you earn. And whenever possible, use any extra money you have each month to put in some sort of savings account offered by your bank or other trusted financial institution.
These seven smart money hacks will help you achieve financial success and gain peace of mind! (Especially during uncertain economic times.)
Want to learn more about overdrafts and how to prevent them? You’re in the right place! Learn more.
Do you have an emergency savings account in place? Learn more about how it can help offset expenses from an unforeseen financial crisis!