To build your budget, you do not need to be an accounting genius or have any sort of advanced financial knowledge. Just a great discipline will be more than enough to help you carry out your finances more proficiently BUT remember that creating a home budget and executing it successfully is not a one man show; You need to get your entire family involved.
An effective home budget will allow you have more control over how your money is behaving. Basically, the budget will reflect what you will do with the money you receive. The budget should help pay for what you need and save for what you want. You should clearly define what a “Need” and “Want” means for you;
Need is something which you can’t live without. And Want is that thing that you wish to have to enjoy life.
Today, I want to give you some guidelines on how to create and home budget which will help you achieve your family’s financial goals.
Write Down Your Family’s Net Monthly Income
In the first column of the budget, you must indicate net monthly income of your family. The major cash inflows are generally payroll or Social Security pension in the case of retirees. Other incomes may include alimony, interest on bank accounts, unemployment benefits, extras jobs, part time businesses, etc…
Several types of net revenues:
- Professional income: wages, overtime pay, bonuses, gratuities, allowances.
- Pensions: retirement, disability, widowhood, unemployment benefits, alimony.
- Financial income: interest on accounts and deposits, dividends, rents collected.
- Other income: grants.
The possibilities for increasing income may be limited. If the situation permits, you can try to negotiate a raise, a job change or a second job. However, it is not easy to increase revenue, so it is usual best to try to reduce the costs…
Evaluate the Costs
Expenses are all cash outflows. You must include all current expenses from housing to the small daily expenditures. And we must not forget other occasions such as holidays, birthday gifts and Christmas shopping and rebates. The more specific information you put in your budget; the more effective will be your budget. Therefore, it should collect the necessary documents, receipts, shopping, bank statements, books, tickets and invoices.
If you do not have this information, you can use estimated amounts, as adjusted to reality. Some months you may spend on one category more than others (expenditure on food in December is not the same as in February and may use more electricity in January than in May), so the estimate should be a calculated average.
In many homes, the monthly income is stable, but the costs vary. A few months will be spending less and a small surplus is achieved, other months the expenses are greater than income and the surplus is used to pay previous months. The problem arises when expenses exceed income for several months in a row. Then the savings are exhausted and have to borrow to meet payments.
It is advisable that the costs do not exceed 90% of revenues, in order to save at least the remaining 10% each month. This 10% can be allocated to reduce debt, build an emergency fund or accumulate capital to make a major acquisition and prepare for retirement. The more you save, the more investment options are and have more control over the future.
To achieve a healthy financial position, it is mandatory to cut spending. In the second column of the budget, you should record all expenditures made each month and differentiate it by type of disbursement. It should distinguish between:
Mandatory fixed costs: The amount does not usually vary much from month to month and cannot be left to pay. This includes the mortgage or rental of housing, community fees or bank loans. If the bank is not paid within the time limits, additional costs of delay and the amount paid and the debt becomes overwhelming. Additionally, you may be affected by the debtor’s credit history, thus obtaining credit in the future is difficult. In the worst case, if not make the payments, you could lose your home, or face lawsuits and demands, with associated costs.
Variables Expenses (Necessity): These are the utilities (water, gas, electricity, telephone, etc.), food, clothing or transportation. These expenses are necessary in daily life, which can be reduced if a more moderate, such as using energy saving light bulbs, take public transport or lower the temperature of the heating consumption in some degree.
Discretionary Expenses: These types are all other expenses, if necessary, could be reduced or eliminated. When it comes to saving in general is easier to start with discretionary spending. The example of Discretionary expenses includes; meals away from home, leisure activities, shopping for records and films, Night-out, etc.
It is better to involve the family and know in detail the costs of each of its members to make an effective budget. To achieve the goal and reduce costs, all have to work together.
Apply the new budget according to the necessary adjustments
The purpose of a budget is that revenues cover all costs, including 10% for the monthly savings. Having identified the necessary cuts, we must establish the budget, commit to it and revise it to fit to reality with achievable goals. Therefore, if a salary increase is achieved, it should not increase spending by the same amount.
In addition, it is important to keep updating your family budget every month, especially in the first months and when it is more than likely not have identified all possible expenses.
Thank you for reading folks, I hope you enjoyed today’s rather long article. 🙂
Sorry it’s been overdue but I’ve been really sick this week and couldn’t get myself focused enough to blog. 😉
Make sure to drop me a comment below about how to plan on creating your budget! 🙂
Till next time…