A Step by Step Guide to Creating a Household Budget

Having a family or household budget in place, trying hard to stick to it and then monitoring your achievements are the cornerstones of financial freedom. Attempting to run your personal finances without a budget is like trying to steer a ship without a compass. For one person this is difficult, but when a family is concerned it is downright dangerous. Do yourself and your family a favor by following these six steps for setting up a household budget plan. You will soon start to reap the benefits of being in control of your finances.

Step One – Assemble your income

The first step in creating a family budget is to ascertain just how much income you actually have. Use the printed wage payment advice received from employers, for all sources of income for all adult members of the family contributing to household revenue. If you have any investment income, such as interest, dividends or property rental earnings, include those as well. Your most recent income tax return should help you to identify your income sources and amounts.

Ideally you should have a monthly budget, so convert your weekly, fortnightly or annual income into monthly figures by multiplying or dividing as appropriate. If your income varies from month to month in a way you are able to predict, try to include those variations rather than using the same figure for each month. For wages, use the net income after deductions for income tax and items such as pension, union and health care scheme contributions.

Put all your figures into a spreadsheet and add each month’s income sources to arrive at a total net income figure for each month for the next twelve months.

Step Two – Identify your non-discretionary expenses

Non-discretionary expenses are those items about which you have no choice. They include rental or mortgage payments to put a roof over your family’s head, simple food requirements, essential clothing, utilities such as electricity, gas and telephone, basic health care and transport or vehicle running costs.

Ideally your household income will be able to provide for these basic necessities and have some cash left over for discretionary spending on the articles and activities that make life more pleasant. In the developed world, in a family where one or more adults is in full-time employment, this is usually possible.

If you are having trouble identifying your expense amounts, one way to track them is to look at your monthly credit card statements and add up the amounts spent on groceries, clothing, fuel and transport.  Your file of paid utility bills, if you have one, is also a good source of information. However, if you normally pay in cash and have no record of your spending on essential items, now is the time to begin keeping a record, in a notebook kept in your pocket or purse. Alternatively, just keep the receipts given to you at the cash register, and add them up once a month.

To get you started, take a look at the annual survey of consumer spending published by the US Bureau of Labor Statistics. The first table shows average spending in 2010 on various household items across the entire survey, but the tables beginning on page 11 are particularly useful. They will help you to predict your likely expenditures based on factors such as your annual household income, your age, and the number of people in the family.

To complete this step, add up all your non-discretionary expenses to arrive at a total figure for each month.   

Step Three – Calculate the margin left for discretionary spending

This step is quite easy. Simply deduct the total of your non-discretionary expenses from your total income. With luck this sub-total will be a positive number, and the good news is that you can now move on to the next step, the pleasant task of deciding how you will spend this margin of comfort on some discretionary purchases.

It is not necessary for the result to be positive every month. Some months, such as those in which quarterly utility bills or annual insurance premiums are payable, may produce a negative number after non-discretionary expenses are covered. Provided the annual total is positive, there should be no problems.

If the annual total after these essential payments turns out to be a negative number, you will need to revisit your list to decide if any of them are really discretionary items in disguise, and trim them. Such items might include cell phone or Internet costs, where using a fixed telephone line and free Internet services at the local library or community center would help in reducing or eliminating these expenses. If the number persists in being negative despite all your efforts, you may need to consider taking a second job or applying to social services to avoid going into debt.

Step Four – Decide on your discretionary expenses

For those with a positive cash balance available to spend on life’s little luxuries, this is the enjoyable part of creating a budget. You can not only afford to indulge yourself, you can decide exactly how you will do it. You can include eating out, movies and other forms of entertainment, alcohol and cigarettes if they appeal to you, family vacations, better food and clothes, new household appliances and electronic gadgets: in other words, whatever takes your fancy, as long as you stay within your budget.

Once again, past credit card statements, filed bills and the annual survey of consumer expenditure already mentioned will be your best guides to likely amounts. Add them all up to arrive at your total discretionary expenses for each month.  

Step Five – Finalize your budget

Taking the discretionary spending margin calculated at Step Three, deduct the total of discretionary expenses calculated at Step Four. If you have been reasonable in your estimates of non-essential but enjoyable expenses you will still have a moderate sum left over to contribute to your rainy-day savings. Once again though, if the result is negative you will need to take a second look at your discretionary expenses and reduce them until you reach at least an annual break-even point. A small surplus is preferable to give you some comfort if things don’t go as planned.

Step Six – Monitor your budget

Now that you have your balanced or surplus-producing budget, don’t just put it away in a drawer and forget about it. Your family budget plan is your tool for keeping on track financially. Create extra columns in your spreadsheet to list your actual expenses next to the monthly budget figure for each item. In this way you will get an early warning if your expenses are starting to spiral out of control, and unusual or unexpected expenditure will be highlighted so that you can further investigate it. It may be something unavoidable, or an item that you forgot to include in your budget, but at least you will be aware of it, and be able to adjust another expense to compensate.

Creating a family budget plan is not a complicated exercise. It is a task well within the reach of anyone with average arithmetic skills. The few hours spent in setting it up will return substantial benefits in terms of personal financial control. Budgets deliver a way of measuring, and hopefully providing for, all of your family’s needs without the risk of going into debt.