Budgets and Money

Household Budgets and Financial Planning

A household budget is a spending plan that helps you determine where your money should go each month. It doesn't have to be complicated, but it is the foundation to other financial goals.

Building a Budget - and Prioritizing Your Spending

When you're building a financial plan, one of your first steps should be to build a basic household budget. This simple spending plan helps you determine where your money should go each month. It doesn't take long to create, but it's the foundation for everything else you're going to need in order to reach your financial goals.

Determine Your Income

The first step towards planning your budget is to determine exactly how much money you have coming in. Chances are 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 Spending

Once 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 often adjust when you need to.

Decide on a Savings Goal

After 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.

Managing Debt

Debt 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.

Use the Rest for 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. Be sure to include some spending for fun activities each month. By setting aside a certain amount for entertainment, you're probably less likely to cheat on your budget.

Here's another tip for this category - break down your spending as much as possible. In other words, if you break down broad categories into subcategories, you're more likely to find ways to trim that budget when necessary. For example, you might take a category like clothing and divide it into kids' clothes, parents' clothes and drycleaning. Similarly, a broad category like personal care might break down into hair care, nail care, beauty supplies, gym membership or healthy and beauty.

Where the Money Goes

The chart below illustrates consumer spending in 2010, according to a study from the Bureau of Labor Statistics.

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This article is for information and educational purposes only; does not necessarily represent the opinion of Protective Life Insurance Company; and, is not intended to serve as financial planning advice but, instead, to supplement other information specific to your situation. For information about Protective Life and its products and services, visit www.protective.com.

Household Budgets and Financial Planning

At Protective Life Insurance Company, we believe the more you understand best practices for money management, the stronger your financial future will be. That's why we provide educational information on financial planning, budgeting, saving and more. What options should you consider? Our goal with this article is to outline just some of these issues and items you need to consider as you plan your financial future. Because every situation is different, we always recommend you speak with a financial advisor about your personal situation. They will be best suited to helping you walk through the issues with financial planning for your specific situation.

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On this website and in our social communities, you'll find other information that will help you educate yourself about financial planning and budgeting. Take a look at these articles for some helpful things to consider.