Creating a household budget

One of the most frequently asked questions about money management is how to develop a household budget that works. Far too often, people wait until they are in financial trouble before they start thinking about budgeting. Either they get laid off or they find themselves dealing with a large unplanned expense. Either way, a household budget could have helped.

Evaluating your cash inflows and outflows on a monthly basis seems to be the best and simplest way to get a handle on your finances.

Your first step is to figure out your monthly income after taxes. This is the "net" amount deposited into your bank account. If your income varies, calculate the average of your net income over the last 3 months. And don't forget to add savings account interest here too - every penny counts.

Then make a list of your fixed monthly expenses - meaning you pay the same amount towards them each month. That may include: housing (mortgage or rent), car payments, credit card and school loan payments, phone, cell phone, cable TV, satellite radio, child care - all of it. Don't forget to list the bills that come quarterly, annually, or semiannually.

Now you should have two columns: one for net income and one for fixed monthly expenses. But you're not ready to compare the two against each other just yet. There's still more calculating to do.

For now it's time to account for all the variable expenses you have each month: dry cleaning, personal care, groceries, medical costs, pet care, entertainment, gifts, and anything else you spend money on. This is where budgeting starts getting a bit more creative.

Estimate other weekly and monthly expenses. The more precise you can be, and the more of your variable expenses that you can think to include, the more accurate and effective your budget will be. For example, when you calculate food costs, that might include groceries, work and school lunches, and occasional dining out. Specifics matter, even when you're making estimates.

Before considering this step completed, and just for good measure, review your checkbook ledger and credit card statements for the last few months to see if there's anything you left out.

Add all these variable expenses to the column containing your fixed expenses and add the two together. You now have an idea of your total monthly expenses. Subtract this sum from your total net income.

And now the moment of truth has arrived! If the remainder is positive (greater than 0), then congratulations! You've done well. You already live within your means and can start kicking your savings plan into high gear, whether you're saving for retirement, for charity, for your children's college education, for a new home, or for a vacation.

If, however, the number is negative, fear not. It's that way for most of us. At least now you know where all that money has been going. All you do now to bring that remainder back into positive territory is adjust the numbers on your variable expenses. Hopefully that will do it. Then you just have to stick to those newly realized budgetary constraints (or make adequate adjustments to compensate).

If that doesn't do it, you may have to take a more drastic look at either your lifestyle or your income sources or both.

But before you hang your head and resort to taking on that second (or third) job, bring your family into the conversation. Discuss how you all can better prioritize your expenses. Choose certain categories with tallies you'd like to bring down and set targets monthly to try and reduce those costs. Play around with the numbers until something works.

Other options include comparison-shopping for cheaper prices and lower rates on certain expenses. Trim non-essential allowances, for example: go to the salon every three weeks instead of every two. Or trade in that gas-guzzler for a more fuel-efficient vehicle.

If at all possible, it's also highly advisable (to say the least) to take 10% of your income off the top and "pay yourself" - start building up a savings.

Creating and sticking to a budget then maintaining its relevance and effectiveness by adjusting it regularly is essential in successfully managing your finances. Now you can start to make decisions based on facts and not guesswork. You're better able to plan for so-called "unexpected" future expenses and, even better, the things you want.

And for an even easier and more effective way to create and manage your household budget, use a simple budgeting software like Budget Forecaster from Strativia Software. It'll set you on the path to financial security.

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