Creating a budget is simple once you know a few basic categories and best practices. It’s sticking to a budget that’s tough, but writing one down is an important first step. After all, it’s much less likely you’ll stay on track with a financial plan or achieve long-term goals if you don’t at least have a working draft on paper.
Here are four basic steps to build your household budget:
Track money coming in. Before we know how much you have available to spend, we must know all sources of income. It’s important to track not only your annual salary but also the monthly or bi-monthly amount on your paycheck after taxes and deferrals. Be sure to factor in other sources of income, too, like royalties, Social Security payments, or required minimum distributions from retirement accounts, if applicable. Put them all down on paper or in an Excel spreadsheet, and total your monthly income.
Figure out your fixed expenses. Most of us have recurring expenses that don’t change from month to month. Mortgages, loan payments, insurance premiums, and subscription services typically remain the same over the course of a year and should be built into your budget. You might not be able to change the amount, but you might have control of the timing. Try to align your bill due dates or auto-pay dates with when you receive your deposited paychecks. Especially if you get paid twice a month, you’ll want to pay expenses from each paycheck as evenly as possible or you’ll find certain times of the month tighter than others. Audit fixed expenses on your bank statements at least annually. Has the amount changed? Do you still need all of those subscriptions? Update your budget at least once a year.
Calculate an average of expenses that change. Some expenses must be paid each month, but the amount varies. This includes bills like gas and electric as well as how you use discretionary resources. Groceries, eating out, car maintenance, and home improvements are a part of life, but you should have control of how much and when that money is spent. Use your online banking or bank statements to total the cost of those expenses over 12 months and find the average. Once you know that baseline, you can plan for it in your budget but know that you have wiggle room to tighten up if needed.
Set reminders. You have to remember to reference your budget regularly if you want to stay on track. For many of us, the hardest area to stay on-budget is discretionary expenses. So, if you struggle to keep up with grocery costs, for example, take that portion of the budget out in cash. Sometimes it’s easier to monitor a line item when you can watch money deplete tangibly. Or, you can establish separate checking accounts for fixed and fluctuating expenses – having bills auto-withdrawal from the fixed checking account, and tying your debit card to the account for fluctuating expenses. This might make it easier to monitor what’s left to spend each month.
These four steps will help you build an accurate household budget. We’re here not only to make sure that your budget fits your lifestyle but also that you have the coaching and accountability to stay on track with your plan toward long-term financial goals.