A household budget isn’t a wish list based on how much money you want to have & how you plan to spend it. It’s a step-by step plan of how to spend the money that you actually have & it only works when it’s realistic. If you set up your budget on real numbers you’ll always know where your money’s going – you’ll never be worried about making your mortgage payments – and there will always be chances to change your spending habits if you want to fine-tune along the way.
Make sure your budgeting system isn’t too complex, or you won’t use it. A simple, easy-to-use plan based on monthly amounts tends to work best. If you want to build it step by step, start with your income.
Simply add up what you earn per month – Make sure that you move forward after you calculate what your monthly net income will be. For example, if you make $72,000 a year, this number divided by 12 (months) is $6,000 gross a month. Once applicable taxes, health insurance, and EI (for example) are deducted, you might only be left with 4,700 net a month. It is this net amount (what’s left of your monthly gross income) that you’ll be using to cover your expenses from month-to-month and should base your budget on.
After you calculate your monthly net income, it’s time to list your expenses. Don’t go crazy with the categories. Just use general designations that are easy for you to follow:
1 – HOME – mortgage payments, insurance, property taxes, etc. all fall under this category. This is the most important item on your “expense list” to manage, because paying off your debt is a high priority. Knocking that principle down a.s.a.p. will take the burden of monthly payments & interest off of your shoulders.
2 – UTIILITIES – bills for water, electrics, gas, phone, Internet, etc.
3 – CAR – payments, insurance, gas, repairs, inspection, tires, etc.
4 – FOOD– groceries, lunches at work, etc.
5 – PERSONAL – haircuts, movies, restaurants, gifts, alcohol, etc.
6 – BIG BUYS – this category is what you can put your money into if you want to set some aside for a large expense, like a vacation
7 – BUFFER – mistakes and unexpected occurrences will hurt your budget plan if you don’t set some money aside for emergencies, inflation or any other unforeseen event
Each month, see how well your actual expenses adhere to your budget, and make the necessary adjustments. Hopefully what you thought you would spend isn’t too different from your planned amounts & the amount you actually have spent each month. However if there are big differences, tweak your budget whenever you can.
WARNING: This process can be a massive eye-opener. What you spend on eating out, clothing, recreation, movies, haircuts, and other luxuries can be shocking. But once you face the music and actually get to know where your money is going, you can calculate which areas need some cutbacks.
Finally, using your budget to put extra money aside per month will help you get through the lean times, giving you a feeling of stability instead of riding that “feast or famine” rollercoaster. You’ll be prepared for emergencies, increased rates, and more. Most importantly, you’ll never have to go without making a mortgage payment. In fact, if you adhere to a simple, realistic plan you’ll never have to “go without,” period.