If you are wondering how to set up a household budget for yourself and your loved ones, you are in the right place! We will discuss a few questions you need to answer to kick off your household budget and review some tools to help you.
There is no one-size-fits-all approach to setting up a monthly household budget. However, some common steps can be taken by most households that will get them on track with their finances.
Why do you need a budget?
When setting up your monthly budget, the first question is: ‘what is your objective?’ Are you looking to understand better where your money goes, or do you have a goal you are working towards? Your budget planning rigour will need to change depending on the answer.
How do you define household budget?
Do you live with your partner or roommate? Do you include all your shared spending under household costs? Do you have separate non-household costs as well?
If you are not alone in your household, then at the very least, you will need to align on the following:
- What does spending count towards the household budget?
- How do you finance your household budget? What amount each of you will contribute, if any?
How does your household spending look like today?
Before setting up any budget, you would need to understand the baseline. The last thing you want is to have an unrealistic goal you can never achieve, which will only invalidate the whole budgeting idea. So start small and first record all your current household outgoings.
Don’t worry; it does not need to be as daunting as it might sound. There are plenty of templates on the internet to simplify your process. And if you hate spreadsheets as much as we do, you might want to look into tools like Monshare. These are designed to analyze your expenses as close to ‘effortlessly’ as technologically possible.
What are your fixed expenses?
You need to answer this question on the way to a realistic household budget.
Certain things cannot be budgeted simply because those are things you need or love. Now we ask you to be reasonable here.
It would be best if you had a roof, food, safety, basic sports, and that Netflix subscription during the pandemic. But just because you love caviar does not mean it is something that you should include in your base expenses.
Your base expense, or your fixed expenses, should be considered in your household budget as a lump sum only: it makes no sense to analyze them further at this time.
What buckets of expenses would you like to track and budget?
I know your mind is wondering already; you might think … all of them. Hold your horses. We are not building a robust accounting system here.
We are defining a household budget that you can sustain for a long time. As a rule of thumb, you don’t want to go over seven categories and probably want to stick closer to 5.
These are the budget categories we recommend tracking:
- Fixed expenses (read the point before)
- Household costs – everything you need to buy and pay for that makes your household…a home. This would include groceries, cleaning materials, non-essential monthly subscriptions, etc.
- Personal shopping – non-essential shopping, including clothes and personal electronics.
- Fun – everyone needs some fun, even your household budget:-) Your movies, games, parties, self-care – what have you- will go here.
- Savings – you will want to budget for it separately. If your income allows for it, you should target, at the very least, 10% of your income to be put aside as savings.
- Vacation – set aside some money towards your well-deserved rest and track it monthly and annually.
- Other – everything else that did not fit above. You might need to reshuffle this when it’s more than 5% of your spending.
How much do you want to save?
Start with defining your target savings and redistributing the amounts between the rest of the groups. If you need help setting up and controlling the budget for each group, look at this free personal budget spreadsheet.
How realistic is your budget?
Track your expenses against your newly defined budget for a couple of months and revise the process. You might notice that you are too liberal with the definition of ‘Fun’ or have many ‘accidentals’ in your ‘other’ bucket. That may mean one of the following things:
- Your budget is unrealistic for your household, and you need to revise it.
- You are not diligent enough to stick to your budget and allow yourself too many ‘cheat days’ (just like on a diet, yes:-)
- You have a lot of unexpected and unplanned expenses and need a break. That is ok. We all need that sometimes.
A household budget is essential when trying to manage your expenses and needs. We hope you found our short guide on how to set up your household budget helpful.
There are many things to consider and considerations to make, but it is important to be aware of what you spend money on to stay on track with future goals.
Remember, sometimes things slip through the cracks. If this happens, don’t be too hard on yourself. Come up with a plan for getting back on track and stick with it, and good luck setting up your budget!