Determine your incomeThe first step toward planning your budget is to determine exactly how much money you have coming in. It's likely that most of your household income will be coming from the job(s) you and your spouse hold. Take a look at one of your pay stubs and see how much you get each month after taxes and payments for items like healthcare. If you have any other income coming in from other sources, such as stocks or a rental property, be sure to include that in your monthly total as well.
Subtract your fixed spendingOnce you know how much you have coming in each month, you should subtract your necessary fixed expenses from the total. These are expenses you absolutely have to pay each month and can't change for the time being. This includes bills like your mortgage or rent, utilities, car payments and insurance premiums. Remember that even items like groceries, while they need to be factored into your budget, are NOT fixed costs. These are variable items that you can adjust when you need to.
Decide on a savings goalAfter you've subtracted your necessary expenses, you should set a target savings goal out of what's left. This is money you're going to put aside for long-term financial goals like building your emergency fund, saving up for your college expenses, and saving for retirement.
It's important to put your savings aside as soon as you get each paycheck because otherwise it's very easy to spend everything and not have any money left over. Once you decide on a savings target, you may want to schedule automatic transfers to your investment or savings accounts so you'll be sure to reach your monthly goals.
Manage debtDebt plays a bit of a mixed role in a budget allocation. If your accounts require minimum payments, you should consider these as part of your necessary expenses. Missing minimum payments damages your credit score and could lead to expensive penalties so you really need to make these payments on-time. From there, a good strategy is to consider paying down your debt as one of the financial goals to be paid out of your monthly savings.
Track variable spending
The final category in your budget should be variable spending. This is spending you have control over and can adjust if necessary. This includes necessities that you can delay such as buying new clothes or paying for home renovations. It also includes entertainment spending such as going out to dinner or taking a vacation. Tracking variable expenses will allow you to see where you're spending the money that is “not spoken for” by fixed expenses, debt payments and savings. Begin by making a list of specific spending categories. For example: Housing, food, auto, entertainment, savings, clothing, medical, etc. It might look something like this:
• Home (mortgage, upkeep, insurance)
• Auto (loan, maintenance, insurance)
• Food (groceries, restaurant purchases)
• Utilities (Gas, electric, water)
• Health and fitness (medical, gym membership, grooming)
• Travel and vacation
• Personal (entertainment, shopping, clothes)
Then keep a journal to track how much you spend in each of those categories. By breaking down your spending into categories, you'll know where your money goes each month and can likely find ways to trim the budget when necessary.
Creating and maintaining a household budget may take a little time and effort, but knowing where your money is may help you make better long-term and short-term financial choices, and provide you with peace of mind.