Household Budget

Benefits of a Budget

If you’ve never taken the time to create a budget, you may be wondering if it’s really worth the effort. However, a budget is one of the most effective money management tools available.

A household budget can help you:

• Learn to live within your means.
• Pay your bills on time.
• Dig yourself out of debt.
• Save money for bigger purchases like a new television or a vacation.
• Be prepared for emergencies such as an unexpected job loss or a serious illness.
• Plan for long-term financial goals like financing your child’s college education or saving for retirement.

What is a Household Budget?

Essentially, a household budget is a spending plan. It tells you where your money needs to go and helps you find the money for the things you want. Many people choose to budget on a monthly basis, but you can also create a household budget that works on a weekly or bi-weekly system if this fits better with your pay schedule.

Although every family is different, many people have the following categories in their household budgets:

• Rent or mortgage
• Utilities
• Car payment, gas, and other transportation-related expenses
• Cable
• Cell phone
• Internet access
• Credit card payments
• Student loan payments
• Medical expenses not covered by health insurance
• Groceries and restaurant meals
• Clothing and toiletries
• Charitable donations
• Gifts for friends and family
• Entertainment expenses

Some people choose to prepare their budget by hand, but there are many free budget worksheets and online budget calculators that you can use to make the task easier. If you already take advantage of online bill-paying systems, you may even choose to use software such as Quicken or Microsoft Money to manage your household budget.

Zero-Based Budgeting

As you’re creating your household budget, you may find yourself wondering if you should account for every penny or allow yourself a margin of error in your budget.

A budget that uses all of your expected income is called a zero-based budget. Every dollar must be assigned a specific job -- whether it’s for buying groceries or paying the electric bill. While this type of budget may seem very restrictive, it’s the method preferred by Dave Ramsey and other financial experts. Research has proven that people who plan all of their spending in advance will be more likely to stick to their budget on a long-term basis.

However, creating a zero-based budget does have one potential drawback. If you decide to create a zero-based budget, it’s important to make sure all of your spending categories are realistic. For example, estimating that you typically spend $100 per month on new clothes when this number is actually closer to $300 will guarantee that your zero-based budget fails. Before you create a zero-based budget, try tracking your spending for one month to ensure that you have an accurate picture of your finances.

Budgeting for Variable Income

Although creating a budget is a relatively simple task, it becomes much more difficult when you are self-employed, working on commission, or in an industry where your income varies on a month-to-month basis. In this case, you have two options:

• Use your lowest monthly income from the previous year to create your budget.
• Take your income from the previous year and divide the number by 12 to calculate an average monthly income.

No matter which option you choose, you’ll need to make saving a priority when you’re living on a fluctuating income.

Additional Information

If you’re interested in learning more about budgeting your family finances, check out the following helpful resources:

• How to Make a Budget and Stick to It
• Get the Most from Your Budget
• Trimming the Fat from the Family Budget
• 20 Ways to Save on a Shoestring
• Budgeting on a Self-Employed or Irregular Income

Additionally, take a look at the household budget and spending plan ideas that financial expert Mike Schiano shared with LoveToKnow Save.

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