By Jordan Watts
If you live with others, you’re probably used to sharing things in your home– food, the couch, and bills. It makes sense that you would also share a home budget. In this article we’ll dive into how to make a home budget to ensure a successful household and keep everyone’s spending under control.
Think of a home budget as your guide on the journey to collective financial success as a household. It leads the way to controlling your expenses, rather than being controlled by them.
In the simplest terms, a home budget is a spending plan that takes into account the income and expenses of your household. Regardless of whether you live alone, with roommates, or a partner, a home budget can help you manage all expenses effectively. By calculating your cost of living compared to household income you can begin to implement savings goals and work towards achieving financial freedom.
While everyone has unique financial goals, almost everyone can benefit from a household budget to better understand their spending habits and build confidence in decisions about money.
Before you can begin to lay out your home budget, you’ll need to understand how much money you’re making each month as opposed to how much you’re spending. This will give you a clear foundation to start from when laying out your budget.
Your net income is how much money you actually take home each month after taxes. To calculate your monthly income you’ll list all sources of income that you expect to receive regularly each month. This is not limited to your paycheck from a full time job, it can also include regular Social Security income, employee benefits (such as stipends), pay from a side hustle, and more.
If your monthly income is variable it’s wise to estimate conservatively in order to set yourself up for success. Better to have extra money than not enough.
Everyone who contributes to your household budget should take the time to calculate their net income. From there you can calculate your total household income based on how much each member is expected to contribute.
Do you know where your money is going? You’d be shocked at how many people don’t. Tally up all your current expenses to see how they compare to your household’s monthly income. Your expenses will fall into two main categories: fixed expenses and variable expenses.
Fixed expenses are all costs that remain the same from month to month. Your rent or mortgage, cell phone bill, childcare, and subscriptions all fall into this category. While you may be able to cut out discretionary spending on subscriptions, most fixed expenses are necessary to maintain a functional household.
Calculate the total monthly cost of your fixed expenses to be accounted for in your home budget.
On the other hand, variable expenses are those that change each month. Groceries, eating out, gas, and utilities can all fluctuate in cost from one month to the next. Take a look at your bank statements from the past few months and estimate how much you spend on an average month.
Pro Tip: Don’t forget to budget for expenses that you pay annually, such as gym memberships. Divide these expenses by 12 to get their monthly cost.
Variable expenses can often be reduced or eliminated by making wise financial decisions. For example, in states with a deregulated energy market you can shop around for the best electricity plan for your home with EnergyBot’s Comparison Tool.
If you’re uncertain about calculating your variable expenses, consider using a budgeting spreadsheet or budgeting apps to track spending daily. After tracking your expenses for a month you should be able to calculate your total variable household expenses. Add this cost to your fixed expenses to get your total monthly expenses for your home budget.
Pro-Tip: Label purchases as necessary or unnecessary to help get a better sense of your discretionary spending as a household, compared to the actual cost of living.
Now that you have a solid understanding of your household income compared to expenses, it’s time to set some financial goals. Set a variety of short and long term financial goals that you hope to achieve. Short-term goals should take 1 to 3 years to achieve, while long-term goals could take decades. For example, a short-term goal might be upgrading your kitchen while a long-term goal could be paying off your mortgage.
Be explicit about your goals and include them as line items in your budget. Ideally, you’ll want to put money toward them each month in the same way you set aside money for expenses.
Now that you have a full picture of your financial health it’s time to create a household budget. There’s no one right method for how to make a home budget, just make sure you’re taking into account personal budgets of household members.
Today, there are a variety of budgeting methods already available that you can use to track spending and achieve your financial goals. Some of the most popular methods are the 50/30/20 budget, the envelope budget, and the zero-based budget.
The 50/30/20 budget splits your income into three categories: 50% necessities, 30% wants, and 20% savings. Not only does this method help you to ensure you have enough money every month for the cost of living, it also helps you to build up your emergency fund in case of unexpected events through savings.
If you’re trying to stop making impulse purchases or reduce debt and need rigid structure, envelope stuffing might be the best budget for your household. Envelope stuffing involves filling envelopes with an allotted amount of cash on a monthly basis. Once the envelope is empty, you can’t spend any more money on that category for the month.
If you want to track every single dollar you make, this is the budget for you. For a zero-based budget you use every dollar from your income in a deliberate way– whether that’s for household expenses, a future vacation, or savings.
After you’ve determined what type of budget best fits your household needs, it’s time to start adding line items to actually meet your goals!
Start simply with your monthly take-home income and organize your known expenses based on the method you chose. Use budgeting apps to track your spending and make note of any reason you go over the month’s budget.
The same way a guide can’t help you on your journey if you aren’t willing to listen and take advice, a home budget won’t help if you can’t stick to it. Ensure that you’re managing your expenses effectively to reduce stress and align with your priorities.
Over time you’ll need to make necessary adjustments to your spending to stay on budget and reach your financial priorities. At the end of the month review your spending and look for places you can reduce shopping and improve your finances. Small lifestyle adjustments can lead to a huge impact on your finances.
Consider cutting back on discretionary spending and saving money, especially on expenses that don’t add to your quality of life. Unnecessarily high expenses, such as your electric bill, can be cutting into your savings. Try improving energy efficiency in your home and periodically comparing prices to ensure that you have the best electricity plan for your home.
The key for how to make a home budget work for you is to review and adjust regularly. What works at first is unlikely to work forever, especially as your financial priorities evolve.
By reviewing your budget regularly you can ensure that you’re staying on track and making progress towards your goals. If you find that you’re not, it’s time to adjust. Over time people often see pay and lifestyle increases that aren’t properly reflected in their initial budget. By adjusting your budget to properly account for these changes you can ensure your continuing to save more money and spend less on impulse purchases.
Pro-Tip: Use a budgeting spreadsheet or app to visualize your spending and savings. Everyone loves to see their bank account going up over time.
Your home budget isn’t just about cutting costs–it’s a guide to making smart financial decisions and improving your personal budget over time. Start with a simple budget, adjust as you go, and stay proactive about your expenses.
Ready to save on your home budget? You can start by comparing electricity rates with EnergyBot. Customers save an average of 20% on their monthly electric bills.
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