Household budgets and financial planning

Good financial planning begins with a basic household budget. Creating a budget helps you understand where your money is going each month and also allows you to develop a plan for saving. By having a household budget in place, you can easily track your spending, save, and more easily monitor and reach your financial goals. Here are some simple steps to create and maintain a household budget.

Determine your income

The 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 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 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.

Manage 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. You may consider paying off your mortgage. Paying extra on your mortgage can take years off your loan and possibly save you tens of thousands of dollars in interest.

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)
• Savings

Then keep a journal to track how much you spend in each of those categories. If your budget doesn't seem to be working out the way you anticipated, here are some of the possible reasons why:

You've created an unrealistic plan

If you want your budget to work, you need to be realistic about your spending. For example, if your bank statements indicate that you typically spend $600 a month on groceries for a family of four, then cutting back to $550 a month can be a realistic goal (saving you $50 a month). However, if you set unrealistic goals (let's say spending only $400 a month on food), you're just setting yourself up to fail.

You're not accurately tracking all your spending

Creating a written budget means nothing if you ignore the predetermined limits that you've set for yourself. After all, isn't that the very reason why you created a budget? To ensure that you're staying on track, consider taking the time at the end of each week to add up your purchases or totals in each category. For example, if you find that you've exhausted more than half of your grocery budget and the month is only half over, then you need to make some adjustments. This means getting creative with some of the best ways to save money and by stretching your food budget so that it lasts the entire month.

You're not including all your expenses

If you're not including all of your monthly expenses, your written budget isn't going to work as anticipated. You must be able to plan for almost any expense that will come up during any given month. For example, you may have budgeted for gasoline expenses each month, but what about oil changes? And don't forget about services such as haircuts for the family and medical copays for office visits and prescriptions. Be sure to factor in irregular payments that may include quarterly insurance or tax payments, or annual birthday gift expenditures. To create an all-inclusive budget, get out your calendar and brainstorm any expenses that are expected to arrive in the next 30 days.

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. It is also a good idea to save in advance for large variable expenses such as the holidays, summer vacation or a large purchase.

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.