Your household budget is the foundation of personal financial planning. As the old saying goes, “you can’t manage what you don’t measure,” and too many people set up a budget without actually tracking where their money goes. A household budget can only work if you measure what you spend against what you earn.
Part of the purpose of creating a household budget is so you can take charge of your finances, controlling where your money goes and ensuring you have enough to save for the future. And even if you plan your monthly spending, there inevitably will be expenses that are not part of the plan. That’s why you should track every penny you spend every month.
Establish Saving and Spending Targets
When creating a household budget, you want to start with income. How much money do you take home each month? If you have predictable sources of income, then you should have a set amount of money each month to start with.
Now you have to add up your expenses, which is never as straightforward as you think it will be. The best approach is to break your spending into categories, then list specific monthly costs under each category. For example:
- Fixed expenses – These include rent or mortgage, car payments, student loan payments, and cable bill.
- Variable expenses – These include groceries, gasoline, electricity, and phone bill.
- Unplanned expenses – These include doctor bills, car repairs, and unplanned entertainment.
Your first concern should be to ensure that you aren’t spending more than you earn. Almost 80 percent of Americans are living from paycheck to paycheck, largely because of poor financial planning. If you fail to keep track of your expenses, unexpected bills may create a shortfall at the end of the month. Try tracking all your expenses for a period of several months to get an average of your monthly expenses. If you find you are overspending, minimize some of the variable costs, such as groceries and entertainment.
Part of good financial planning is establishing financial goals. As you map out your budget, you should include savings as part of your plan. Unfortunately, 65 percent of Americans are saving little or nothing for retirement. Establish a savings plan with both short-term and long-term objectives. Your short-term goals could be saving for the down payment on a new car, new appliances, or a vacation. Long-term planning should include goals such as saving to buy a home, paying for your children’s college, or retirement expenses. As part of your financial plan, you also should have an emergency fund set aside that will allow you to live for three months if you lose your job or are unable to work.
One approach is to use the 50/30/20 rule—50 percent of your income for necessities, 30 percent for wants, and 20 percent for savings. There are other strategies as well, such as “paying yourself first,” i.e., prioritizing savings before you pay for anything else. You also can try other strategies, such as applying the 30-day rule or, rather than splurging on that new pair of shoes, putting the money in savings.
Ways to Track Your Spending
Once you establish your budget goals, you will have to find the best way to track your spending. There are a variety of strategies you can try.
To get started, you might consider using an old-fashioned spreadsheet. Setting up a computer spreadsheet is an easy way to list all sources of income and expenses and track spending by category. The challenge is making sure that you keep track of everything. You can try making notes of spending on your mobile phone or keeping receipts, but you still have to enter all the data into the spreadsheet.
There are also a variety of software and mobile phone apps designed to simplify budgeting and financial planning. For example, Quicken allows you to create a budget and track your spending, and there is a mobile app that lets you enter transactions as you make them and then sync them with your spending tracker. Other packages, such as Mint, Money Dance, Personal Capital, and Acorns, offer similar functions that make it easy to track your spending using your smartphone. First State has its own mobile financial planning tool, MoneyTrack, designed specifically to help you budget for your future.
You also have to be diligent about balancing your checkbook and your credit card statements. To simplify expense tracking, consider using your checking account and a designated credit card for all transactions. That way, you only have one or two monthly statements that reflect all your spending. You can get other savings benefits, as well.
If you are struggling with financial planning and creating a workable household budget, remember that First State Community Bank has other tools like MoneyTrack that can make the process easier. For example, we offer a financial literacy program, as well as all the checking and savings products you need to manage your money. We also offer the Pocket Change program that adds to your savings every time you use your MasterCard®. If you need help planning your financial future, contact us. We are always here to help.