How to Make a Household Budget Work

New habits can be a challenge to adopt. Fortunately, the longer one sticks with a new habit, the more likely it will become automatic. Making small changes, setting a goal, and partnering with someone to keep you accountable can also help. An important financial habit for individuals and families alike is budgeting. A budget can help you and your family make better financial decisions, keep you out of debt, and prepare for emergencies.

What is a Budget?

Keeping track of money flowing both in and out of a household is budgeting. A household budget allows both individuals and families to plan for the future. With a budget, it is possible to not only know how much money is available each month to save, but also to ensure that certain expenses are paid on time. A household budget can also lend itself to financial peace of mind. Moreover, a budget can help reinforce how harmful debt can be to your financial lifestyle. When finances are under control, weathering financial obstacles–an unexpected medical emergency or major car repair–will be easier, and will enable you to lower the financial stress that often accompanies unplanned events.

Setting up a Budget

The initial step of gathering financial documents and scheduling time to build a budget may be time consuming but it will end up being time well spent. A budget is only as good as what you input into it. Financial documents, including statements for both bank and investment accounts, annual W-2s and 1099s, loan and mortgage documents, and utility and credit card bills are all needed to build a solid budget.

For some individuals, income will be fixed and easy to incorporate into a budget. For others, variable income (seasonal, part-time, or freelance work) will require a monthly income estimate. Income sources include net pay for full-time and part-time W-2 earners, self-employment income, child support, Social Security, annuities, and other retirement income.

Using bank and credit card statements along with receipts will help in identifying expenses. Depending on where you are in life, expenses may include mortgage or rent, car and student loans, health insurance, child care costs, groceries and dining out, entertainment, transportation, and even money set aside for vacations and savings. Expenses can then be categorized as fixed or variable. Fixed expenses, like rent payments, stay the same from month to month while variable expenses, such as groceries and dining out, change from month to month. Equipped with an understanding of what you are currently spending versus what you can afford to spend will enable a household to see what changes need to be made.

Budget Software

While a budget can be organized on paper or in a spreadsheet, budgeting software can add to your experience and make it easier to foster a budgeting habit. Some budgeting software offers credit monitoring and even investment tracking. In most cases, it is possible to sync your financial accounts with a budget software program. Unlike accounting software, which tracks what has been spent versus what is owed, budget software is forward-thinking and allows a user to allocate money before it is spent. A basic formula to a personal budgeting method entails dividing up your after- tax income into three separate buckets: 50% spent on needs; 30% spent on wants; and 20% to spend on savings or paying down debt.

Throughout life and as changes occur, such as marriage, children, buying a house, financing a car, and starting a new job, it is a good idea to review your budget and make changes where necessary to keep your household goals in check.