Running a household is very demanding. You have to consider a lot of things: your children’s education, your needs, setting up an emergency fund and more. It’s difficult to find time to create a family budget, especially if at the end of the month, the money left in your pocket is less than what you expect. It is essential to check on your household finances and be honest about it, so you can do something about it.
Establishing a household budget is difficult to learn, so you have to make time for studying it. Managing your family’s finances can be stressful, but you shouldn’t let it get to you too much. The first thing to do is to identify an attainable financial goal. For example, this may be a college fund for your child or paying off some debt. It is easier to keep yourself on track if you can envision your financial goals.
Here’s a guide on how to set up your family’s budget effectively:
Choose your budgeting tools
The best way to start the process of creating a budget is to begin with the basics: selecting the budgeting tool you’ll be using to keep track of your finances. A budget worksheet with paper and pen is as just as effective as electronic tools. However, there are many technologies that have given birth to easy-to-use financial software that can help reduce errors.
Everything depends on what tools you are comfortable using. Choose whatever feels right to you. If the paper method is what you’re used to, an accounting ledger is specifically designed for debits and credits within your bank statements. Plus, they are very affordable. You’ll also need a budget calculator.
If you’re opting for electronic tools, there are many simplified budget tracker applications to help you establish your household budget easier. You won’t have to manually write down and account for every single transaction regularly. Electronic tools boast of software that efficiently creates running totals, makes suggestions, track expenses, highlights unnecessary spending, and balances debits and credits.
Start organizing your bank statements
This applies to everything that shows any incoming or outgoing money. It may be about earnings or sources of income, bills, receipts, student loan interest, credit card statements- as long as they are involved with your financial standing, you need to consider them.
First, separate incoming and outgoing. You will need a total for both categories, so you need to sort them out first. This is the step most budgeters dread, but it is essential to creating your budget. You may notice that the incoming amount is smaller than the outgoing, but always remember that it is the exact reason why you are creating a family budget.
Separate Fixed and Variable Expenses
After you’ve sorted your bank statements to incoming and outgoing, you need to break the outgoing ones into subcategories. This may include utilities such as water and electricity, unsecured debts like credit cards, secured debts such as a mortgage, and discretionary spending, which involves expenses like clothing and food.
It is important to note that out of all expenses, the one that adds up faster than everything else is discretionary spending. You might think that a few nights out and some movie tickets here and there are not a big issue, but once you’ve listed them down, you’ll find an astonishing amount piling up. This subcategory is the one you will have to work on most.
Set up your Tools
Now that you’ve organized all the details you need to know to plan your household budget, the next step you need to do is to add them to your spreadsheet, ledger, or budget software. This is where your monthly budget takes shape. Your short term goal is to lower your expenses so they aren’t higher than your income.
Track and control discretionary spending
The main reason why you need to write down your numbers is that by doing so, you can track and control your budget more realistically. Discretionary spending is the only category that you can modify and divert toward your savings and more important expenses. All the other categories like utilities recur, but you can’t let them accumulate, otherwise, you’ll have more problems in the future.
An excellent way of managing discretionary spending is the envelope method. Many families have tried this method and have seen great results. You simply sort and allocate your money for everyday expenses and place them into separate envelopes each month. The best thing about having your cash on hand is that you’re more aware of it, and you’re less likely to overspend since you can see your money disappearing, literally.
Controlling discretionary spending is difficult, but with a lot of self-control and motivation, you’ll be able to balance your budget.
Pay off Debts
Paying off debts is one of the most common reasons why families have to work on their household budget. The most effective way to achieve this goal is to pay at least the minimum amount every month. If you have the chance to pay more than the minimum, that’s even better. It will reduce your debt faster, but it may also mean that you’ll pay less interest.
Make sure to check with creditors to know if extra payments will be posted the way you want them to. In some cases, the interest is fixed, so regardless of whether you pay an additional amount each month, it won’t change. It may be a great idea to get a free credit score so you can shop for lenders. Don’t worry too much if your credit is looking a bit weak. As long as you stick to your budget and pay off your debts slowly but surely, you’ll be able to improve your credit score. Raising your credit score will benefit your family in the future, so make sure to focus on this step.
Managing your household budget can be daunting, but once you’ve learned how to properly balance your budget, controlling your finances will be easier. The key is to be aware of your credits and debits, where your money is spent and what you owe. Set a realistic budget to help your family reach your financial goals for a better future.