All households, no matter their income, must decide how best to allocate their resources and manage their budgets. These decisions can be difficult as they require balancing immediate desires and short-term needs with savings and long-term investments. But having an intentional conversation about this topic allows you to commit to a plan that can help you achieve your future financial goals and ultimately provide greater control over your resources.
Developing a household budget requires understanding your regular revenues (employment income, investment income, rental income, etc.) and expenses (mortgage, monthly groceries, car payment, etc.). You also need to identify your long-term financial goals and any irregular expenses you expect in the near future, such as a major vacation. With this information in hand, you’re ready to develop a monthly household budget. In the budget, you determine how your revenues should be allocated to the various expenses and other goals. This approach is systematic and allows you to evaluate your spending, saving and investing needs together.
Where to Start?
First, list all your expenses. Start with your fixed costs, which are set amounts paid each month, such as a house mortgage or rent, car payment, cell phone bill, child care costs, etc. Next, list your variable expenses, which are expenses that occur each month, but the dollar amount varies, such as groceries, gas, entertainment, etc. Utilities may be variable or fixed, depending on the utility, but be sure to include them.
You should also brainstorm items that occur inconsistently throughout the year, but where saving each month would be helpful, such as travel, home improvement, clothing, etc. If you’re planning to save more for retirement, make note of that as well so you remember to plan for that monthly contribution.
After you finish your expense list, determine which account you’ll pay each expense from, such as your checking account or credit card.
Now you’re ready to create a monthly budget sheet, like the following.
You can print this and complete it by hand, or you can maintain a digital file in Microsoft Excel or online in Google Documents. It’s important to find what works best for your household.
Monthly Budget Sections Defined
Here’s a breakdown of the monthly budget sheet.
Total projected budget
This is your household monthly take-home pay. This sample household has $10,000 a month ($120,000 take-home a year).
Remember, any deductions from your paycheck such as taxes, 401(k) contributions, healthcare, etc., are already taken out before you reach this take-home number. If and when your take-home pay increases, you can easily update this figure on the tracking sheet and allocate the additional revenue.
Total allocated budget
This amount simply tracks the total amount you’ve allocated to expenses. This amount should not exceed your projected budget.
These are the expenses you pay monthly, where the dollar amount stays the same. As mentioned earlier, this category may or may not include utilities.
- Transfers from checking – These are expenses you pay with transfers made directly from your checking account.
- Transfers from credit card – These are expenses paid by your credit card each month. Since you include these expenses in your budget, you pay them off at the end of the month (or whenever you pay your credit card) through a transfer from your checking account.
Variable (Paid by Credit Card)
These are expenses that vary from month to month. Even though these costs are variable, you still set a budget that represents how much you’re willing to spend on this category each month. Throughout the month, you can monitor spending to make sure you stay within budget.
As costs are incurred, reduce your balance to track the expense.
The individual tracking tables help you keep track of discretionary funds. Enter costs as you incur them. Once you’ve spent the budgeted balance, any excess is covered by the reserves in the respective fund.
Several budget categories in the sheet have “fund” at the end. These represent separate savings accounts that receive regular monthly contributions and are subject to withdrawals to meet cash flow needs as described below.
Home improvement fund
Use this fund to cover house repair and improvement costs, like a new roof, refrigerator or washer/dryer. Build a capital improvement plan to determine the timeline for your household improvement costs. This fund is there to dampen and shield you from having your monthly resources drained by one of these costs and to have it planned for and already set aside.
Travel and short-term savings fund
Are there costs you pay annually, semi-annually or quarterly? Often those payments cause financial stress, especially if they’re insurance payments or subscriptions paid once or twice a year. Add up the total of these fixed, mandatory costs and divide the cost by 12 months to determine how much you need to set aside each month. Treat travel expenses the same way, as many people travel only at certain times of the year. Rather than having a large shortfall in the months with your more expensive trips, start saving enough each month to cover travel costs over 12 months.
This will vary per family, but usually it represents three to six months of living expenses for your whole household. Families with two working spouses have a bit more flexibility on this. This fund serves as the source to cover unexpected expenses, like a root canal or repairing your car.
Spouse discretionary funds
Deciding where and how to spend money can often lead to difficult conversations as members of the household prioritize items differently. One person may want a new TV, while someone else wants a wardrobe upgrade. One way to help mitigate this recurring tension is for each person to have a dedicated discretionary fund with a contribution each month. The fund is for the individual’s use, no questions asked, so they can enjoy activities or items important to them. One person may spend the contribution every month, while the other lets it build so they can purchase a more expensive item.
The tracking section at the bottom of the budget allows you to enter any purchases made during the month and the requisite decrease in your monthly allotment without dipping into the fund.
Child expenses fund
Daycare, tuition, sports, clothing, schoolbooks, and other costs throughout the year can really add up. Fortunately, most of these expenses are predictable and can be planned for. Add these expenses up and divide by 12 to get the monthly savings rate you need to cover these costs. Doing this reduces anxiety and shortfalls come tuition payment time because you’ll be prepared for the whole year, rather than just the current month.
- Lay out all your monthly and annual expenses and identify your savings and investment goals. We recommend you go through this process with your spouse or partner to ensure that the household is committed to making this useful.
- Determine the savings buckets you’ll need. If you have too many, it might become burdensome and potentially cause you to run into limitations with your bank.
- Modify the budgeting worksheet above and make it your own. Enter your projected budget (based on your monthly take-home pay and other monthly revenue) and allocate it to your various expense categories. This is where you will prioritize your spending.
- Create a template that you can reuse from month to month and that can be easily updated as circumstances change. Excel or Google Docs are easy options.
- Open the planned savings accounts at your bank. Be sure to make them joint accounts if you’re married to avoid estate-planning complications. Keep in mind many banks require that you have a minimum balance, usually around $300, to avoid fees.
- Track your spending throughout the month and if you have funds left over in those categories, make the necessary savings account transfers. Remember, if you have a big trip one month, it’s likely you’ll spend that month’s allocation to the “travel fund” and make a withdrawal from that fund to cover additional costs.
Note: Depending on the time of year you move to this system, you may be hit by large bills, such as tuition, vacation, or holiday gift buying, that you haven’t had enough time to save for in full. This is when you need to adapt and be flexible. Be aware that it may several months of consistently applying these techniques before you see the changes to your excess monthly cash flow and smoothing of your larger expenses.
Automated Employer Savings
Contributions to your employer’s retirement plan and other savings plans (HSA and deferred compensation) that are automatically deducted from your paycheck don’t need to be accounted for in this budget, as they are deducted prior to arriving at your take-home pay amount.
It’s important to remember that the key to achieving your goals is having a plan and applying discipline and consistency to implementing that plan year after year. It doesn’t take a high income to have enough resources to retire on time or early. Rather, it requires having the proper balance between your spending, savings and long-term investment.
These skills also apply to families in or nearing retirement; having and using a budget is crucial to staying on plan and meeting your goals. Far too often, people retire without an understanding of their true spending. You also can’t forget about taxes at that stage.
Lastly, the worksheet and examples used in this article represent a framework for you to modify and make your own. Work with your advisor to customize it for your family’s specific circumstances and retirement plan.
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Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.
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