If you’re looking to get ahead financially, there’s nothing easier and better for you than creating a comprehensive budget plan for yourself and your family.
In this short guide, I’ll explain how you can create a household budget that really works, and how you can stick to it to start accumulating savings, building an emergency fund, and even start investing in the future. Budgeting really changes lives, and it doesn’t have to make you miserable either – keep reading and I’ll show you how to get more of what you want out of life by keeping more of your money than before and how to organize your finances to help secure your future.
Three Things to Keep in Mind
1. Your Income is Up to You – Budgeting is for income earners of all levels – from minimum wage workers to highly-paid executives. With that said, budgeting helps you allocate your money efficiently to ensure that your needs are met, but it won’t increase your income on its own. If you make $2,000 per month and your expenses amount to $2,500, you’re going to find it impossible to accumulate savings. While cost reduction is an important budgeting strategy, increasing income has more to do with how qualified you are for good work and how you’re willing to spend your time. Long haul truckers are in high demand and earn excellent pay, but most people aren’t willing to give up time with their family. If you’re income-obsessed, remember that the latest studies show that $60,000 to $75,000 is the optimal income for personal happiness.
2. Avoid the “Misery Diet” – A lot of people think of budgeting as a system of depriving yourself of what you want to pinch a few extra pennies – that couldn’t be further from the truth. In fact, the last thing you want to do is to put yourself on what I call the “misery diet”. If saving money means taking all the things out of life that bring you joy, you’re doing it wrong! Budgeting is all about finding a happy medium – a system of providing for your own needs, including your personal happiness, in a way that’s financially responsible and sustainable.
3. Budget for Peace of Mind – When I first started budgeting, I took a lot of comfort in knowing that if I just stuck to my plan, everything was taken care of. My debts would get paid down in due time, I would accumulate savings, and I still had enough left over for Taco Tuesday. Peace of Mind happens when you create a sustainable budgeting system that really works, and feeling secure in your finances and decisions is the best reason to pay attention to where your cash is going.
Get a Handle on Household Expenses
Every successful budget starts with an understanding of what I’d call “Household Expenses”. These are the costs that you simply can’t cut every month – they’re obligations that are consistent and that you’re always responsible for. If you don’t meet these obligations, someone is eventually going to freeze your bank account or knock on your door. The number one goal of your budget is to ensure that you can pay household expenses every month. Here are some common ones you might list:
- Rent payment
- Mortgage payment
- Car financing payment
- Car insurance payment
- Home insurance payment
- Cell phone bill
- Utility bills
- Condo fees
- Credit card minimum payment
Start off your household budget by listing and quantifying all of your household expenses that you can’t possibly avoid.
Comparison Shopping to Cut Costs
Once you’ve quantified household expenses, it’s time to do some of the hard work associated with budgeting. If your household expenses represent a high percentage of your total monthly income, you’ll find it difficult to save any money. For example, if you make $2500 per month and spend $2000 on household bills, that leaves just $500 for all of your other categories of spending: subscriptions, consumer goods, groceries, eating out, entertainment, etc.
Reducing your expenses or increasing your income will help with this, and since income is ultimately up to you, I’ll provide some tips for reducing your expenses.
Cell Phone Bill – Most major phone carriers have a customer retention department that can offer you a better deal than you’re currently getting. Phone in and ask to speak to customer retention, threaten to cancel your plan and try to get a better offer. In the worst case, you’ll end up with a better package for the same price, but you might find a plan that meets your needs and still saves you money.
Utility Bills – Invest in energy-efficient lighting, shower at the gym sometimes instead of at home (you can even exercise while you’re at it, if you’re so bold), and be vigilant about turning lights off when you leave any room.
Home/Car Insurance – If you purchased insurance through a traditional insurance agency, there’s a good chance that you overpaid or that you can get a better deal elsewhere, especially if you have a good driving record.
Five Accounts You Need to Have
Once you’ve driven down costs as much as you can, you’re ready to set up the simple five-account budget plan that helps guarantee you’ll save money. Most people get their paycheck and deposit it into one account where they pay all of their expenses and then save whatever is left – wrong! Allocating your money into the proper account when you get paid helps ensure that you’ll stick to your plan and accumulate savings. Always save first! Not last!
Household Expenses – Tally up your household expenses and add some money to help cover them each time you get paid. If your household expenses are $1000 per month and you get paid twice a month, put $500 into this account each time you get paid. The goal is to always have your household expenses covered. I like to keep an extra pay’s worth of contribution in here so I’m always slightly ahead.
Emergency Fund – Saving three months of living expenses can protect you from all kinds of disaster, including job loss, unexpected car repair or a medical bill, or other unforeseen expenses. Once you’ve paid into your household expenses, put 20% of what’s left towards this until you hit your target. Then you can start accumulating longer-term savings.
Savings – I always recommend keeping a savings account somewhere that you can’t see it. Human nature dictates that when you see your money, you’re more likely to spend it. Opening an account at a separate bank and using it just for cash savings is a great way to accumulate extra money without really thinking about it. Once you’ve got an easily accessible emergency fund, start saving for the long-term by contributing 15% of your pay to this account.
Cash Account – This is your spending account for every category of personal expenses. What you do with this money is up to you! You can pay for a gym membership, subscriptions to your favorite entertainment services, buy groceries, clothes, shoes, or whatever else you want. Like I said before, there’s no point in dividing expenses into infinite categories. Only you know what it takes to make you happy, so give yourself permission to do that with the money in your cash account – within reason, of course.
Investment – Once you’ve got an emergency fund and established some savings, you might want to think about investing. It’s possible to lose money with some investments, but the main risk is that you won’t be able to access these funds right away if you need them. Any money that goes here is money that you can afford not to see for at least a year, so this type of account works best if you’ve already stabilized your financial position.
Saving money with budgeting isn’t rocket science and it doesn’t have to be a miserable process either. It just means getting a handle on your expenses, reducing some needless spending and finding ways to make yourself happy that are more sustainable. At the end of the day, you’ll be less stressed knowing that you’re able to meet your own needs and take care of any emergencies that come your way. This simple system can be used for anyone of any income level to start meeting their financial goals today – so what are you waiting for?