A home budget monitors cash inflow and outflow and ensures that spending does not go out of hand. Creating a budget for the home makes it easier for you to decide what you want to do with your money. Running the home on a budget prevents wasteful spending and consumption. Planning a home budget is essential to the financial success of you and your family. A well-structured plan ensures that the financial health of the home is in good condition.
There are numerous misconceptions about home budgeting. Many believe that budgeting restricts one’s freedom of choice and that it is only for people who are in debt. Others believe that it just involves balancing checkbooks, and it is only for those who are wealthy. Regardless of all these misconceptions and negative reactions to budgeting, planning a home budget is very much important for your household. When you run your home without a budget, it can lead to so many problems.
Is a Home Budget similar to a Personal Budget?
There is a difference between a home budget and a personal budget. A personal budget is a budget based on one person’s income and expenses, while a home budget is a budget created on the income of more than one individual and the expenses they share. Home budgets include the available income of every adult involved in running the home.
Planning a home budget should include the collective expenses or shared expenses of the individuals living in the home. The expenses include mortgage or rent, utilities, car expenses if it is shared, shared food, and child care if children are involved.
A home budget gives you the liberty to;
Build an emergency and long-term savings account.
Be in control of the inflow and outflow of cash in the home.
Avoid debt.
Cover food, transportation, entertainment, housing, and eating out.
Prevent financial arguments that might arise at home.
Take advantage of financial opportunities like investments in preparation for retirement.
Eliminate wasteful household expenditure.
STEPS IN PLANNING A BUDGET
Build the foundation of the home budget
Identify an important financial goal and link it to the budget. Budgets work best when there is an end goal tied to them. Do not start budgeting because you see it as a trend, and people are doing it. If you start budgeting with that kind of goal, you will not be able to continue the budgeting process. Start planning your budget with the right mindset, and you will see a huge difference.
Analyze Expenses
Examine all the household expenses and identify the ones that are of topmost priority. Not all expenses or bills need to be paid immediately. Some bills are more important than others. For example, purchasing food is more important than buying a new car or a new gadget. Some households do not know how to prioritize their expenses. Hence, they end up spending money on unnecessary items.
Itemize the recurring monthly household bills like rent, utilities, and insurance. Do not forget to add the common periodic expenses like debt payment, vacation, etc. When prioritizing the home expenses, group them into spending categories as outlined below;
Needs
When planning a home budget, differentiate the needs from the wants. The family needs or the needs of those living in the home should be catered for first before any other thing. Shelter and security are survival needs that involve paying rent and other bills to make the home comfortable, like electricity, water, trash, and sewer bill. The fact that shelter is seen as a survival need does not justify the purchase of a home or the lease of an apartment that exceeds one’s financial capacity to pay for it. Food and clothing are survival needs too. Emergency funds, savings, and health are survival needs.
Wants
There are some household wants that are critical and sometimes feel like needs. While some people might be able to live without these critical wants, others might find life difficult and inconvenient without them. Some of the critical wants include access to internet services etc. When planning a home budget, make sure you put the survival needs above the critical wants.
Also, trivial wants are wants you can do without. For example, going to the movie theater is something one can do without. For most homes, dining out is a trivial want. Getting a tattoo, purchasing fashionable clothes and accessories, buying gifts, and upgrading gadgets are all trivial wants.
Prioritizing your expenses enables you to build a reasonable and balanced structure that allows you to know which expenses are important and expendable. Hence, it becomes easier to erase some household expenses from your home budget when the need arises.
Record Household Expenses
Track your household expenses and list them into categories. Review bank statements and any other receipts received in the past two or three months.
Record Household Earnings
Determine the collective income of your home. Make sure you combine your income with your spouse or whoever lives with you in the house and reflect it in the budget. Only the net income of all parties involved should be considered in the budget.
Compare and calculate your income and expenses.
After analyzing your expected household income and upcoming expenditure, the next step is to deduct the planned expenses from the projected income. If the amount derived from the deduction is above $0, this means you should live below your means and vice versa. If the amount is near $0, you are expected to live within your means. Strive to make the household live below their means so that investment and savings can be built.
Identify weak spots and plan accordingly.
When planning a home budget, identify all weak spots and balance the household budget. In an attempt to balance our household budget, most times, we immediately cut expenses. But cutting expenses should not be the only way to balance your home budget. Another way to balance your home budget is to increase your income. Some ways to do this include;
Engaging in side hustles
There are tons of ways to make money outside of your normal employment hours. Some side hustles bring in money within a week or two, while others take months or years to build before it starts bringing in money.
Get a better job
If your current job does not bring enough revenue to cover your expenses, look for a better job. Bear in mind that it takes months and years to secure new employment.
Seek a raise from your current job
If you do not have the time or patience to look for another job, seek a raise from your current employment.
Get a second job
Take seasonal jobs to make ends meet during difficult periods.
Adjust your expenses
When most people are planning a home budget, they skip steps 1 to 3 and start with 4. Then when budgeting fails, they begin to cut off their expenses based on emotional reactions.
Never make financial decisions based on emotions. Making decisions this way will not serve you well in the long run.
When planning a home budget, ensure that you create a budget that works for your household. Know that budgets can fail due to so many reasons like a job loss, change in income, and unexpected expenses such as medical bills, car repair, etc. When this happens, you will have to review and adjust your budget, then adapt your budget to your current lifestyle.
One popular method used in planning a home budget is to adopt the 50/30/20 rule. This method suggests that you use 50% of your net income on necessities, 30% on wants, 20% on savings, and paying debt off.
If you are struggling to find the best method to adopt in creating your home budget, you can reach out to a financial planner or a personal finance expert. Getting personal financial advice from an expert or professional would help you make the most of your budget.
Planning a home budget will help to achieve the household’s short and long-term goals. In addition, having a common plan allows everyone in the home to work towards a common goal.
CONCLUSION
The best way to set yourself up for a successful budgeting process is to embrace the whole process. Think of budgeting as a process that needs to be done in other to live a fulfilled financial life. Before planning a home budget, research finances and ask a lot of questions so that you will not be caught unaware. Having enough financial knowledge is important.
The idea of planning a home budget may seem overwhelming initially, but when you start, you will wonder why you did not start earlier. Whoever is responsible for the finances in a home largely determines what goes into a budget. Therefore, the home budget should be done with the input of everyone and be in agreement with everyone in the household. This is necessary if you want the budget to be successful.
