When you’re young, being an adult seems like it’s the best thing ever. You can do what you want, when you want, and spend money however you like. But when you reach adulthood, it’s quickly apparent that money doesn’t go as far as it seems. Except for a select few people, most adults need to budget their income to make it last.
Everyone would agree that setting a budget is a solid plan, but studies show that one in three households don’t have one. These are seven steps to establishing a home budget that will keep you out of financial hot water.
Why Create a Budget?
If you don’t have a budget, there’s a good chance you’re overspending. That can lead to more debt than you can handle and, eventually, to bankruptcy. It’s much tougher to buy a car in bankruptcy or find a place to live. If you can budget your money well, though, you can avoid unnecessary heartache for you and your family.
Steps to Create a Household Budget
There are basic steps to establishing a working budget for your household. Don’t worry if it isn’t working right away. You’ll need to occasionally make adjustments.
1. Set Goals
Do you want to stop overspending, save money for retirement, or buy a new car? Decide what it is that you’re working for. Set realistic goals for your budget so you can look back and measure your success.
For example, don’t make your goal to save $1 million per year if you make $50,000 annually. Start with something achievable like paying off the balance for one credit card.
2. Track Income and Spending
Where your diligence will be tested is in this step. You need to keep track of your income (that’s easy enough) as well as your spending. Your budget relies upon accurate tracking, so any spending needs to be recorded, no matter how small or large. It gets tedious, but you quickly realize where your money is going.
3. Identify Essentials and Non-Essentials
Line by line, tag each expense as either an essential item (something you need) or a non-essential item (something you want). When you can visualize how much of your spending could have been eliminated in a month, you’ve made a breakthrough. You’re ready to make changes in your spending.
4. Create a Balanced Budget
Now that you know how much your income is and how much you (over) spend, you can establish a budget. Allocate money in certain areas for necessities like housing, transportation, insurance, and food. Then allocate what’s left into other funds like savings, spending money, and a rainy-day fund. This is your new benchmark.
5. Start Course Corrections
With your new budget created, it’s time to put it into practice. Before you make any purchase, consider whether it’s essential and decide which fund the money will come from. Do your best to prevent going over budget in any line.
There will be times you overspend in an area. Don’t beat yourself up for it. It might be that it needs more funds allocated there, but stick with your budget the best you can.
6. Expect the Unexpected
You need that rainy-day fund in your budget because unexpected expenses arise. A car accident, a theft, a leaking water heater: You aren’t expecting these kinds of expenses, but they happen. If possible, have a separate savings account open for these types of expenses. And don’t worry about it when you record it in your budget. It’s going to look like a big blip on the radar.
7. Fine-tune Your Budget
After a few months, revisit your budget. Are there areas you do really well and others that suffer? Tweak your budget to make it work for you. That can involve painful spending cuts or just a shuffle from one account to another. Your budget is not static, so make adjustments as you need.