Saturday, December 5, 2009

Easy 4-Step Household Budgeting

The holiday season is round the corner and this is usually a time when we let our hair loose and loosen our purse strings too. However, when the credit card bills come in, the music stops and we are brought back to reality.

To eliminate festive season hangover, why not create a household budget? Keeping track of your expenses can reduce household conflicts and stressful nights. Creating a household budget is easier than you think and can provide quick insights into your financial position.

As we are all about saving money, I don't encourage the use of expensive applications. My favorite application is Excel spreadsheet (or Google Docs which is free). You can create expense and income columns in a matter of minutes and updating is a breeze.

Here is how you can create a quick and easy 4-step household budget.

STEP 1: List Down Monthly Expenses

a. The basic necessities, such as mortgage or rent, utilities (gas, electric, water/sewer), transport, medical expenses and groceries.

As the expenses may fluctuate, you can estimate how much you will be paying over 12 months, and get a cost average for each item per month.

b. Security And Insurance. This will include items which provide security and peace of mind like health insurance, life insurance, auto insurance, and home insurance.

c. Non-necessities. This list includes things that you want, but don’t need, like internet access, cable television, phone, entertainment, etc.

Step 2: Create a List of Income Sources

You should list only take-home income here. Don’t include things like tax credits or bonuses for a more conservative outlook. For the self-employed, consider averaging what you make over the year and starting out with extra savings for those lean months.

Step 3: Evaluate your Net Income or Loss

Take your income and subtract your expenses. If you are in the black, that puts your financial position ahead of many of your peers. You can put the extra money into a Roth IRA. If you max out a Roth IRA, invest the rest in mutual funds, stocks and bonds.

If you’re in the red, you have much catching up to do. Move on to the next step of prioritizing your expenses.

Step 4: Prioritize and Re-balance

A personal budget allows you to cut back in areas to free up more cash.

Do you need the ultimate cable, cell phone or internet package? Do you need 2 cars in the garage? Do you really need a car when you could bike to work? Do you need 7-8 credit cards in your wallet? Do you need to stay in such a big house?

You should also shop around for the best deals to save money. For your insurance, request for at least 3 quotes on each of your insurances per year to evaluate if you could save money by switching insurers.

There are so many items to look at when you want to priortize your household budget. The only thing is to put in effort and start looking.


David said...

A household budget is an effective money management guide through which you can relieve the stress and burden of debt and worry. It is a trusted friend and a necessary step to be taken by anyone serious about making an incredible life change.

The bottom line? Use it! :-)