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 It's funny, we're taught a lot of things in school, but how many of us were taught about the basics of putting together a household budget? After all, don't most youngsters dream of financial independence one day? Isn't the American dream to eventually own a home?
You get the point. We are taught to manage a lot of life's challenges - like balancing a checkbook - but no one ever sat us down and taught us how to manage our household expenses. In this publication we're going to help by providing you with a background in the growing problem of household debt. Then we're going to provide an overview of how you should go about creating a household budget. Finally, we're going to finish up with a template you can use to create your own monthly household budget.
Household Debt and Credit Cards
According to statistics gathered by the Federal Reserve Board, household debt service reached a historical high in the second quarter of 2006. The same holds true for the Debt to Net Worth ratio. These statistics tell us that the average household spends a lot of their disposable income making debt payments.
If you're still not convinced household debt is a problem, then consider the fact that as recently as 2003, bankruptcy filings hit a historical high of 5.5 per thousand persons.
Credit Card Debt
Clearly many American households are not prepared to meet the financial challenges of creating a workable budget for their own home. In 2004, Alan Greenspan talked about the growing substitution of credit card debt for personal debt. The average consumer no longer has to seek the approval of a bank to secure a personal unsecured loan. They can use their credit card for a variety of new purposes - including borrowing money.
Creating a Budget for Your Family
If you find yourself falling behind on your monthly payments, then it's time to start learning some of the basics of creating a budget. The first rule of thumb for a financially sound home is simply this:
Household Income must be greater than Household Expenses
Budgeting 101, right? You'd be surprised how many families break this simple rule. But when you do break this rule, then you need to borrow money to pay your expenses - that is a short-term strategy that can lead to long-term problems if it happens every month.
Pay Yourself First
Some of you may think that household income only has to equal expenses for your household budget to be balanced. That's true if you want to work forever. But we're thinking more long term and that includes a concept of "pay yourself first." Basically, this means that before you pay anyone else put some money aside for yourself - pay yourself first. That's one tip that you should strongly consider as part of your retirement plan.
Creating a Household Budget
You can create a household budget yourself if you'd like - and quite frankly, you'll learn quite a bit about your monthly living expenses if you do. On the other hand, you can use a budget template that someone else has put together. You may not learn as much, but you'll save time.
Later on we will discuss where you can download a budget template for free, but right now we're going to cover the basics of creating a budget. Overall, you want to break the budget down into three sections - income, mandatory expenses and discretionary expenses on a monthly basis.
Monthly Income
Everyone knows where the money comes from - it's where it goes that's hard to track. The income portion of your household budget lays out all of the sources of income that you have coming into the home. This can include paychecks, interest income, tax refunds, stock dividends, bonus payments and gifts of money.
Any reliable source of money flowing into your household each month should be included in the income section of your budget.
Mandatory Expenses
You can think of mandatory expenses as those monthly bills that are "must pay." Here you would include items such as a mortgage payment, car loans or lease payments and property taxes. You'd also want to include expenses such as energy bills and other utilities.
You might also include life insurance, health care costs, childcare, commuting expenses, groceries and other expenses that help you get to work and provide you with a healthy life. Think of mandatory expenses as the absolute last things you'd give up - expenses that you'd consider a requirement of running your household and daily living.
And don't forget to put some money away for the future - that's mandatory. It's one of the fundamental rules for a sound financial planning strategy.
Discretionary Expenses
When you've reached the discretionary expenses portion of your budget, this is where things start to get interesting. That's because this is the place where you really need to do some soul searching to figure out if you need to spend money on these items.
Examples of discretionary expenses include going out to the movies, dining out, extravagant vacations, expensive clothing and other luxury items. You'll recognize this type of expense when you see one. And that brings up a good point.
The best place examine your spending patterns is right on your monthly credit card statement. If you haven't been saving them, then you can probably download them right from your credit card's online website. Take a close look at several credit card statements; you might be surprised at what you see.
Household Savings
Once you've identified your sources of income each month and put together all of your expenses, it's time to see if your budget is balancing. At the very least you want a balanced budget. And at the other two extremes you might be running a budget deficit or a surplus. Here's what you need to do in a simple formula:
Household Income - Household Expenses = Household Savings
If the value for household savings is negative then you've got a budget deficit. If that value is zero then your budget is balanced; if it's positive then you're running a budget surplus - which is the sign of a “good” budget.
Household Budget Forms, Templates and Spreadsheets
If you're good at putting a spreadsheet together, then it shouldn't be any problem to follow the above instructions to create your own monthly budget. But if you're not good with Microsoft Excel or other spreadsheet applications, then you can use one of the forms we've already put together. Finally, if your good with spreadsheets and you're just looking for a budget template to follow, we can help there too.
Household Budget Worksheet
Now comes the part that you've all been waiting for - a household budget worksheet that you can download for free. If you're not interested in creating your own budget, then we've got one that you can use - Personal Budget. As a matter of fact, this budget was included in a two part series called Budget Worksheet.
That particular series covers the topic of putting together a personal budget and even discusses some of the budgeting software options you have - such as Quicken and Microsoft's Money. No matter how you approach a budget, the one thing to remember is that you are taking the first important step - recognizing that the long term financial health of your home is important.
Average Household Budget
If you're putting your household budget together and you're wondering how you compare to an average household then we've got a couple more online tools that might be of interest to you.
Our family budget template allows you to create a family budget and this particular form will also provide you with a variance report (how well you're doing). That budget form was built from an average family budget. And you can download that document to see how the average American household spends their money each month.
We've also got a family budget calculator that allows you to compare your monthly household expenses to that of an average household. All of this information was based on data gathered by the federal government.
Evaluating a Budget
Once you've created your household budget, then you need to start tracking expenses and income. After a couple of months, you should get a good feel for how you're doing and where the money goes.
And while it's nice to remove the stress of falling behind on your bills keep in mind that you need to enjoy life too. Change your purchasing habits or downsize your home if you have to - you might be surprised with how simple life can be when you've got your budget and your life in balance.
About the Author - Household Budget Basics
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