One financial practice that has taken on added importance for many families impacted financially by the coronavirus crisis is household budgeting. During times of financial stress and strain, having a budget can provide a degree of certainty in the midst of the storm — even if the budget has to be adjusted to reflect new financial realities.
Creating a household budget is easier than you might think it is. Here are a few guidelines that can help you not only craft a budget for your family, but also stick with it for the long term.
Determine Income and Expenses
Your first step in creating a budget is to get a handle on your income and expenses. Your biggest source of income is probably the salary or wage from your and your spouse’s (if you’re married) primary jobs. But don’t forget to include other possible sources of income such as alimony or Social Security payments, investment income and income from a side job or gig.
Your expenses, meanwhile, can be divided into two main categories: fixed and variable expenses. Fixed expenses are the costs you incur every month that remain about the same, such as your rent or mortgage, health insurance, car insurance, car payment(s), childcare, retirement savings and utilities (if you use budget billing).
Variable expenses, meanwhile, tend to change from month to month. They include things like groceries, clothing and entertainment — such as eating out and going to concerts and movies — as well as credit card payments. Determine an average of your variable expenses over six months or one year and use this number for budgeting purposes.
Add Up the Numbers
The next step is to list all of your income on one side of a sheet of paper (or in a spreadsheet) and all of your expenses on the other side. Add both sides up and then subtract your expenses from your income. If the bottom line is positive, congratulations — you are living within your means by spending less than you earn each month. If the bottom line is negative, however, you’ve got some work to do.
Specifically, you need to figure out how to do one of two things: Increase your income or decrease your expenses. You could possibly increase your income by working more hours (if this option is available), taking on a side job or gig, or finding a new job that pays more money. Unfortunately, these options aren’t always available to everyone.
That’s why decreasing expenses is a more realistic option for many people. Start with your variable expenses — especially entertainment. Cutting back on going to concerts, movies and restaurants is the first thing many people do in order to balance their household budget. This is a relatively painless step that can quickly bring your budget into line if you’re diligent and disciplined.
Allocating Excess Funds
If you have money left over at the end of the month after paying all your expenses, think about the best use for these funds. One idea is to build up an emergency savings fund. Many financial experts recommend saving between three and six months’ worth of living expenses in case of a financial emergency like a job loss or significant reduction in income. These funds can also be used to pay for other unexpected expenses like major home or car repairs or out-of-pocket medical expenses.
Or you could boost contributions to your retirement account with these excess funds. Another idea is to start a new car savings fund. By saving enough money to buy your next car in cash, or at least make a large cash down payment, you could possibly eliminate one of your biggest monthly fixed expenses.
The 50/30/20 Budget
One popular approach to budgeting is referred to as the 50/30/20 budget. With this budget, you would spend 50% of your after-tax income on needs and 30% on wants while devoting 20% to savings and debt repayment.
Often, the tricky part of this type of budget is delineating between “needs” and “wants.” For example, it’s pretty obvious that food, clothing, transportation and shelter are basic human needs. But do you need to buy expensive cuts of meat and fancy organic vegetables? Do you need to purchase designer clothing and own a closet full of shoes? And do you need to live in a large house in an expensive neighborhood or drive a fancy imported automobile?
Feel free to adjust the percentages based on your financial goals. For example, if you want to bump up your retirement savings or pay down debt aggressively, you could flop wants and savings/debt repayment by devoting 20% to the former and 30% to the latter. You might also want to add a percentage for giving, such as the 10% (or tithe) that some religions encourage giving.
Get Started Now
If you don’t have a household budget, now is a good time to commit to creating one. Doing so can help relieve financial stress during times of economic uncertainty by providing a blueprint for your household finances.
Please give us a call if you have questions or would like personal guidance in creating a household budget.