Money management is important no matter what your income level. With all the demands of running a household, budgeting is a task that can slip away from you very quickly if you bury your head in the sand. Your household budget can easily become something that controls your spending, your credit score, and your late-night anxieties – so getting control of it is key. This how-to guide on creating a household budget is perfect for you if:

  • You’re paying off debt and or trying to stay out of debt that doesn’t serve you
  • You’re saving for a big goal, like a college fund
  • You’re saving for little things, those little treats that keep you motivated in your savings goals
  • You want money to be a source of excitement rather than anxiety
  • You want the money you earn to go further than it currently does

Whatever financial situation you’re facing at the moment, and whatever negative emotions may be tied to taking an honest look at your household budget, know that no one is born with excellent money management. It is a skill that can be learned. So if you aren’t where you want to be just yet with handling your finances, don’t worry.

The step-by-step guide on creating a household budget in this article will show you how to make your income go a little further and work a little harder for you. It should be an accurate, flexible plan that you can rely on month upon month to make better, more conscious financial decisions for you and your family.

Monitor Budget

Decide How You’re Going To Monitor Your Budget

This is an easy place to start because there’s no right or wrong answer; it’s just a personal preference between paper planning and electronic planning. Paper-based accounting ledgers are affordable and are designed around money coming in and going out of your accounts.

There is a wide range of sophisticated apps and spreadsheets available, but a free solution from Google Sheets is simple to use, cloud-based (so access it anywhere) spreadsheet. These are operated just like a paper ledger, but the software will handle the maths for you, reducing errors.

Don’t get too hung up on deciding with this; pick something that seems suitable for the moment and get started. You can always change it later if you need to.

Income Expenses

Identify Income And Expenses

This part can feel intimidating, but it’s not as bad as you expect once you’ve got underway. Pick a day where you can work on this uninterrupted for a couple of hours. Set yourself up to see all your paper documents, and you won’t be called away to do something else in the middle of the task.

Start by logging into your online banking app or gathering up your bank statements from the last 12 months. This is going to give you an idea of the income and expenses on your bank accounts. If you have more than one bank account, make sure you’re collecting them all up. If your bank doesn’t automatically send you paper bills, you may have to order these ahead of time. If you have paper and digital receipts, collect them up too, as these will give you an accurate picture of the cash you’ve spent.

Your income is money that you earn regularly and predictably. It will include your salary and any other income that can be depended upon. If you do any freelance or part-time work, don’t include this if it is inconsistent as the budget plan for your household needs to be as accurate as possible. Use your bank statements to determine what a minimum monthly income from these side streams of revenue is.

Expenses can be grouped into several categories, but they’re all broadly classified as money that’s leaving your account. Check your bank account and group your expenses into three categories:

  • Fixed expenses: regular bills come out monthly or quarterly but at the same amount each time. You know when they’re due, and how much they’ll be. These are likely the biggest single expenses and will include rent or secured debts like mortgage repayments or unsecured expenses like credit card debt.
  • Variable expenses: regular bills come out monthly or quarterly, but they’re not always the same amount. They might include car insurance and repairs, utilities or cell phone bills. These are likely smaller amounts, but they will have the capacity to surprise you and spoil your budgeting plans for the month if you don’t keep an eye on them.

Discretionary spending: this is money you spend through choice and is the area where you’ll probably be able to save the most money and make the best progress with your budget. This could include buying lunch, unplanned clothing purchases, or late-night impulse online shopping.

using a calculator

Calculate Your Net Income

Net income is’ leftover once all your bills are paid—income minus fixed and variable expenses equal net. Money expert, Ramit Sethi, recommends that priority spending from this net income should go on consumer debt, such as credit cards. This debt has the highest interest rate and should be the priority to be paid off first before student loan debt or mortgage debt. He also recommends that when there’s more than one debt, they are paid off from smallest to largest, which is the opposite of lots of other financial experts. His logic is that making progress on these debts is motivating, and each smaller debt paid off will feel like a progression through milestones.

Ideally, net income is going to be something  But even if this is a minus number, it’s vitally important that you know what it is to stay focused on increasing this number as much as possible.

It’s at this point that you will be able to set some financial goals. If you have debt, this is where you can work out exactly what date – certainly to the month, maybe even to the day – you’ll be free of that debt if you keep paying it off as you are. You might look for ways to cut back on discretionary spending to maximize net income and speed up debt repayments.

You may even get creative and start thinking about opportunities to develop additional income through hobbies and secondary revenue sources that could make up an emergency fund. These unexpected expenses have the capacity to set you back if the goal is clearing debt, so getting debt-free as quickly as possible and then funnelling 50% of the money you were paying towards debt into a “rainy day fund” could be a good strategy for creating a financial buffer if the worst was to happen.

Adjust Budget
Adjust As You Go

Discretionary spending has the biggest scope to make a difference to your savings, so starting with this category gives you the most room to make a genuine change in your budget. Pay particular attention to buying lunch out or those small daily purchases – including virtual purchases in app stores that may not feel like you’re actually buying anything and might slip your mind.

Seasonal expenses could include car repairs, birthdays and gifts around the festive season, travelling, or starting a new academic year if you save for education. They are predictable, often large expenses that are manageable when planned for ahead of time.

Consider where in the discretionary spending you have room to make cost-saving swaps. Instead of buying lunch out every day, could you save that for a once a week, or once a month treat and instead bring a packed lunch to work? Instead of buying movie tickets every weekend, could you treat yourself to a Netflix subscription? Or maybe cancelling a few subscriptions you’re not using as much as you thought you would?

It’s not about not spending any money at all, so much as spending it intentionally on the things that actually matter to you.


Set Regular Dates To Check-in

Finally, set aside a few hours once a month to check up on your plan. A budget is a functional document that has to be as accurate as possible. It serves a few purposes; first, it must help to illuminate spending patterns and help you face the reality of whatever your financial situation is. It should show you where your expenses are and give you some idea of where you could cut back. It should give you absolute certainty about how much money is coming into your account – and how much you need to keep to make debt payments or save. You should also be able to calculate with absolute clarity what date you will be debt-free.

But as your spending patterns change, so your saving patterns will change. Setting regular time aside to update the figures will motivate you to take decisive action towards your financial goals.