It’s probably a familiar scenario: You think you’ve been careful with your spending, but then a steep credit card bill arrives and throws you into a tailspin. Or you check your bank account balance and realize you’re perilously close to overdrafting.
Wrangling one’s cash flow and meeting financial goals is no easy task…if you’re operating without a budget. But if you do have a budget (a method of tracking and tweaking your money coming in and going out), you can likely sidestep many hassles and hiccups.
While sitting down with receipts, credit card statements, and spreadsheets might not sound like your idea of a good time, it can help you figure out how much you’re spending each month.
And that, in turn, can help you create a realistic budget. Focus on how great it will feel to pay down debt and have a flourishing savings account. Creating a household budget could get you one step closer to achieving your goals.
Here, the 11 steps that will make it happen.
11 Steps on How to Create a Household Budget
If you’re ready to dive in and start setting up a household budget, here are the 11 steps to take. Have a partner? Collaborate on your household budget together so you can be aligned on establishing your financial management.
1. Set Your Goals
To get started, think about your big-picture goals. What are your financial hopes? Do you want to have a healthy emergency fund saved within a year or two? Pay off your student debt early? Stash away enough cash for a down payment on a house within the not too distant future? Or just control your spending so you aren’t living so paycheck-to-paycheck every month?
Write down your top few goals and the issues you need to overcome (i.e., carrying too big a balance on a high-interest credit card). Be as detailed and specific about amounts you want to pay off or save and by when. This can help guide you as you start your household budget.
2. Find the Right Method
The next move in how to create a household budget is to pick a good system. There are many ways to budget, and the right one is the one that works for your personal money style and financial goals. It can be helpful to review some of the options such as:
• The 50/30/20 budget rule
• The envelope budgeting method
• The zero-sum budget
You will also likely find that your financial institution offers tools to help you budget effectively. In addition, there are apps and websites that offer advice and tactics to help you budget, as well as books and podcasts.
Review a few, and pick what looks like the right fit. Or create your own method that uses the best of various techniques.
3. Get the Right Tools
You may also want to select the right gear to help you budget. For some people, this might mean setting up a budget in Excel. For others, it could lead to buying a notebook and colored pens. Or an accordion folder to keep receipts.
These tools can help motivate you to dive in, similar to the way buying back-to-school supplies used to get you psyched up for the start of classes.
4. Calculate Your Income
The next step in creating a household budget is to dig in and account for all the money you have coming in. Tally up how much money you have coming in every month from your job(s), any side hustles, gifts, interest or dividends, and bonuses.
You want to have more money coming in than you have going out every month, so it’s important to know the baseline you have to spend. Look at after-tax dollars to best assess your resources.
5. Identify Your Expenses
Now, you need to see where that money goes as it flows out of your checking account. Going through one month of expenses and dividing everything into categories can help you figure out exactly what your expenses are. You could divide your spending into categories like these:
• Utilities (Electricity, WiFi, etc.)
• Healthcare and personal care
One important category not to overlook: debt. Make sure to include such expenses as credit card payments, student loans, car payments, and the like.
6. Account for Irregular Expenses
As you consider your spending, don’t forget about those annual or somewhat random expenses that crop up, such as homeowners or renters insurance payments, money for holiday and birthday gifts, and car repairs.
You’ll want to do your best to accommodate those expenses. If you don’t budget for them, you could wind up dipping into savings or adding to any credit card debt you are carrying.
Recommended: 10 Most Common Budgeting Mistakes
7. Determine Your Needs vs Wants
Reviewing your spending is often an eye-opening experience. Do you really spend that much on takeout coffee, streaming stations, or shoes? Did that weekend away with your best friends really total twice what you expected?
Looking at your expenses lays the foundation for separating out your needs in life from your wants.
• Your needs are things you require to survive: food, shelter, utilities, transportation, covering your student debt, and so forth.
• Your wants represent spending that reflects “nice to have” items and experiences: concert tickets, another pair of black boots, some flowers to brighten your coffee table.
Think carefully about what in your spending is a need vs. a want. Groceries are needs; dining out on a pricey plate of pasta is a want. A tankful of gas to get to work for a week is a need; an Uber because it’s raining out is a want.
This information will help you determine the proper amount of spending as you create your budget.
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8. Allocate Savings
As you look at your goals, your income, and your spending, consider your short-, medium-, and long-term savings goals. Many people believe saving 20% of their income is wise.
As you look at how to set up a household budget, also consider where you want your savings to go. You might be stashing away money for a vacation, a down payment on a home, your child’s college education, your retirement plan, or any combination of aspirations. Once your budget is established, you may want to set up automatic transfers from your checking account to savings accounts to make this process simpler.
9. Do the Math
The next step in setting up a household budget is to enter all the information into your chosen budgeting system (spreadsheet, journal, app). Yes, you need a line for every bucket, from student loans to rent to entertainment to groceries to dining out. Having a line item budget laid out will really acquaint you with where your money is currently going.
Subtract your expenses and savings from your income and see where you land. Do you have money left over? Great. Are you in debt? Not so good.
Seeing how you are tracking is a vital step to knowing how to improve on your current situation with a budget in the next step.
10. Create Your New Plan
Next, take a look at how much is coming in and going out and set some new goals. For each of your spending categories, consider setting a realistic limit for yourself. And keep in mind that cutting back on some expenses might mean you have to increase your budget in other places.
For example, say you currently spend $400 on eating out every month and $400 on groceries, for a total food budget of $800. If you’d prefer to spend closer to $200 eating out each month, you may have to increase your grocery spending.
Do you think you could spend $200 on eating out and increase your grocery spending to $500? If so, your total food budget would come down to $700, saving you $100. Could that go towards paying off some debt sooner?
As you work to create a balanced budget, with specific amounts for each category, you may need to:
• Eliminate some expenses, like a gym membership, and try out free workouts on YouTube instead.
• Cut back on spending, such as saving money on streaming services by dropping a channel or two, or getting lattes only on Fridays vs. everyday.
• Consider how to minimize some costs via negotiation and other tactics. Can you get your credit card issuer to lower your interest rate or get a balance transfer credit card to help you pay down your debt?
• Determine if you can raise your income. You might ask for a raise or start doing some gig work via a low-cost side hustle.
Your goal is to know how much you can spend every month on your expenses (needs and wants) while ensuring you are saving towards goals and hopefully building wealth as well. Remember: Every budget needs a little fun in it. Knowing you have, say, $20 a week to buy yourself a small treat can go a long way towards keeping you from overspending elsewhere.
11. Modify Your Budget As Needed
Setting up a budget is all about providing guidance and guardrails for managing your money. It helps you keep spending in check and achieve your financial goals.
But it often takes a couple of tries to get right. For instance, with inflation surging, you may find expenses like groceries, gas, and utilities rising. You might have to trim elsewhere to keep your budget humming nicely along. Or life happens: Your sister gets engaged, and you run out and buy her a great gift that requires some budget retooling.
You might find a lower-priced health insurance and be able to sock the savings into your emergency fund and check off a short-term goal. It can be wise to check in with your budget every week or so to see how you’re tracking and make any tweaks needed.
Or you might discover that you’ve made your home budget too intricate and you are avoiding it. If that’s the case, switch to a different system.
At the end of the day, how to set up a household budget is about making your money work for you, so that you can spend it on the things (and people) you love. Make changes as you see fit. Flexibility in a budget is important to its success.
Tracking your budget regularly could help you see measurable progress as you work toward financial goals. Setting up a household budget can help you better understand your cash flow, manage expenses, lower debt, and meet your saving goals and build wealth.
The right banking partner can help you on your financial journey, too. When you open an online bank account with SoFi, you’ll spend and save in one convenient place and enjoy a suite of tools that can help you budget better. You’ll also earn a competitive APY and pay no account fees, both of which can help your money grow faster.
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