Basics of a Household Budget that Works
Getting a handle on your finances is extremely satisfying. I’d even say it’s downright freeing. No more anxiety about where the money is going and can I afford this and how much should we be paying for that. Here are a few overarching principles and practical points from my own household budget, considerations that I think apply to any budget.
Five Principles of a Strong Budget:
1. Pay off debt. Whether it’s “good” debt or bad debt, debt is debt, and it’s siphoning your monthly income away before you can allocate it to your necessities and, eventually, your wants. Paying off debt frees your income so that you can make it work for you. For motivation and more specific techniques (that work) check out Dave Ramsey.
2. Use a “forward-facing” budget. I have strong opinions on the subject, and it irks me to no end when people think “budgeting” is looking at a pie chart of what they spent in which categories for the previous month. That will not help get your money under control. I like this definition of what a budget is:
An amount of money available for spending that is based on a plan for how it will be spent.
A plan used to decide the amount of money that can be spent and how it will be spent.
So we see that we have to tell our money where to go before it’s spent.
3. Use cash. Even if you don’t use cold, hard dollar bills (although this is deemed best by budgeting die-hards), try to only use one account, and make it a debit account. This way, you have the mental connection that every purchasing choice you make is diminishing your account. Many of us need to feel this “pain” to keep our spending under control. Using only one account for daily expenses also simplifies your record-keeping — a must if you’re serious about keeping your finances in order.
4. Set money aside for intermittent but regular expenses and, separately, for emergencies. This is crucial. Five hundred dollars is a lot harder to scrounge together when the car insurance is due than it is to save for bit by bit every month. Large, unexpected expenses happen to all of us as well. Set aside a sum that’s only to be touched when a true emergency arises (refrigerator dies, need a plane ticket to visit an ailing relative).
5. Account for every dollar that comes in and every dollar that goes out. Yes, this requires keeping track of every transaction, but think of it as a way to re-visit how much you have left in your categories (we’ll discuss this below), etc. You’re building informed mindfulness about your spending, and that’s imperative for gaining financial freedom. (This is true whether you’re a spendthrift or a penny-pincher; knowing what’s available to you can either help you halt a purchase, or free you from anxiety over a purchase.)
1. Get an idea of the big picture. To get started on your own budget, sit down with those in your household who are bringing in and spending the money. Everyone needs to be involved and on board. Make a list of your income, your debts, and your regular expenses, both monthly and intermittent. To add a little fun and incentive into the mix, also list things you want to save for (a trip, a new couch, a kitchen remodel).
2. Break it down. Break down your monthly expenses into actual categories, like groceries, dining out, daycare, car payment, etc. Next, consider how much to allot to each category every month. This is where it’s actually useful to go back and look at how much you’ve been spending in various categories.
3. Plan for intermittent expenses. Divide intermittent expenses by the number of months you have between payments, and allocate this amount to set aside each month.
4. Pay off debt and save. I’m not going to get into the nitty-gritty of paying off debt here, but once you have a small cushion for emergencies, throw everything extra you have at existing debts. Once your debts are paid off, you can start designating extra money for things you want to do or have. The point, monthly, is that you are deliberately telling your money where it’s going.
5. Spend mindfully and record. As mentioned above, entering each transaction in a budgeting app or something similar (I use Pear Budget) ensures that whoever is spending the money knows how much is left in the various categories.
Because everyone has been involved in making the budget and everyone is accountable to the budget for the purchases they make, having a working budget not only provides a sense of financial well-being, but also ameliorates many money squabbles. The financial peace runs over.