to Build a Household Budget
Today, I'd like to talk about the most basic, the most important, the most crucial part of your financial plan. A household budget. Now hang on, before you run away in terror, let me explain.
This is not as scary as some people make it out to be. You don't have to count every single penny you spend. You don't need to keep a spreadsheet of every single time you plan to go out to eat in a month. Although, there's no reason why you couldn't, except there can sometimes be anxiety associated with the minutiae of that activity. So if the idea of tracking your spending terrifies you, I'm here to tell you that financial clarity is actually a lot less scary than financial fog.
So let's go over the top 8 sections you should be paying attention to in a household budget. I promise we'll make this painless, and just to help you while you're watching or reading this, I'm even going to give you the link to a worksheet you can fill out for yourself just so you have an idea of where your money is going. Here it is: Printable Excel Version
Print that out, and away we go.
Are you ready? Let's get started.
#1 Housing
It's the biggest expense most people have each month, and therefore, probably the one you know by heart. You'll write down how much you pay in rent or mortgage, homeowner's or renter's insurance, real estate taxes divided by 12 months, and a little bucket for repairs and maintenance. If your home is newer, your repairs bucket can be small, $50 a month or less. If your home is 100 years old, maybe more like $75 or $100 a month would be more appropriate. This is the bucket that pays for little problems like a leaky toilet, or a new garage door, or a tree removal, but it's also the bucket that pays for the septic when it dies, or the driveway to get repaved, or the roof when it needs to be replaced. As an example, a roof on a typical 2,500 sq ft home costs about $9,000, but divide that cost over 30 years, broken down monthly, and that's $25 a month. Add these items to your worksheet.
#2 Utilities
The second section is for utilities, which is the wicked step-sister of Housing. It's not enough just to pay your mortgage. You have to heat and cool that baby too, not to mention water, phone, internet, TV and trash! Write down how much you spend on each of these per month. If your power fluctuates each month, look at your account statements for a year, add them all up and pull the average by dividing that total by 12. Use that in your spreadsheet so you know what your average power spend is over the course of a year.
#3 Transportation
This section covers your car payment, car insurance, metro train fare, gas and oil, and funding for repairs and new tires. If you have no car payment, but you have the luxury of having a little extra each month, start putting away for your next car so that you've got a fund set aside when your old car kicks the bucket. If your car insurance is paid annually or semi-annually, divide the total by 12 so you can see how much of your monthly income is paying for that expense. Visit your checking or credit card statement and pull the gas visits for the last 3 or 6 months, and then get an average, so you know approximately how much you're spending on regular trips around town. I try to exclude big road trips from these averages and put that expense directly into the vacation budget so that it stays separate and doesn't skew your regular usage numbers.
#4 Clothing
This is a hard one, because people don't typically spend the same amount each month, and with clothing being offered at big box stores, it's hard to pinpoint when you bought that sweatshirt because you were just doing your grocery shopping and you spied it from across the baking aisle, so you grabbed it and it got lumped in with your grocery purchases for the week. It is important to try and get a ballpark number though. If you think you'll need to work on identifying your clothing spend, put a round number in there as a placeholder, then start paying attention now, gather information over a 3 or 4 month window, and then bring that information back to the spreadsheet so it's more accurate.
#5 Food
This is another significantly variable bucket. Holidays and special treats often alter the data so it's not easy to see what your regular weekly or monthly grocery spend is. You can track your weekly grocery receipts for a period of 60-90 days, include a holiday or two, because there's one almost every month, and average it out so your regular weekly number is a little bit higher than the real thing. This gives you a buffer for when you want to have the cousins over for a BBQ, or splurge for a really nice steak dinner.
#6 Personal
These items include health insurance, disability insurance, life insurance, child care, school fees, entertainment like going to the movies or going out to eat during the month, birthday parties, and any other regular or anticipated spending. Some of these items will be the same each month, and some of them may vary. It's important to try to get a handle on both the regular expenses and the variable ones so that you don't go over your budget one month and then have to eat Ramen and peanut butter and jelly the next month just to catch up.
#7 Saving
This is low on the list, but absolutely crucial. You should have 3-6 months of expenses saved up in a high yield savings account in case you get sick, lose your job, or have an unforeseen expense that needs to be paid. Car expenses are usually the mean culprit of savings loss. There are so many things about a car that you won't know is breaking until it's broken, and then you're out time, energy and money trying to get back on the road as fast as you can. Having a rainy day fun is essential to the health of your finances. Secondarily, but no less important, is your retirement savings. You can't rely on Social Security, nobody knows where it will be in 30, 40, or 50 years, or if it will exist at all. You have to be putting money away so you can live in retirement. The earlier you can put away money, the longer it has to grow, and the less you have to contribute overall. I did a whole series of videos on savings vehicles for minors that breaks down a bunch of different savings options, and while the videos are geared towards parents who want to help their kids learn to save, there is a ton of good information in there that people of all ages can use. You can access all of those videos and blogs at luminarywealth.com/resources.
#8 Charity & Tithes
It's really important to give back. In the world of non-profits, we talk about 3 things from donors. Wealth, Work, and Wisdom. If you have the money, give your Wealth. If you have the time, give your Work, and if you have the knowledge, give your Wisdom. The thing is, most non-profits, churches, and charities really need more of the first and less of the other two. So if you have the opportunity to help out causes that are close to your heart, make sure you set aside a little each month to give to the organizations that are making a difference in the world.
Get Started!
This is the most basic, low-level budget. We didn't talk a lot about discretionary spending or vacations, and so many other things you might want to think about. You could argue that those could have a category of their own, or be an item under Personal. Regardless of where you put them, it's important to account for them somehow so that you get to have some fun and not just live to work. We want to help you work to live, so that you can do all the things you've ever dreamed of in this life.
I hope this was helpful, and if you have any questions, don't hesitate to reach out to me. You can email me anytime at Lee@LuminaryWealth.com, or connect with me on LinkedIn or Facebook.
Keep saving, and have a great day!