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How to develop a household budget
Of all the financial habits, developing and sticking to a household budget is one of the most important. Having a solid grasp of your income, outgoings and available disposable income is the secret to remaining debt-free.
The thought of delving into a spreadsheet for your personal finances may sound like the last thing you want to be doing with your time, but the effort is well worth it.
None of us want to be saddled with bad debt and we all want to enjoy our disposable income. Here’s how you can do just that by developing a household budget.
Pick a tool for documenting your household budget (find tools here)
The key here is to be able to work quickly and have access to your budget at any time. For many, that’ll mean turning to their favourite spreadsheet app, but if you’re a pen and paper kind of person – go for it.Our recommendation, however, would be a spreadsheet, because it’ll enable you to run quick calculations on the fly and, with cloud storage technology, keep your budget to hand and safe at all times.
Start noting your total income and expenditure
It’s time to shed light on your finances. There’s no hiding now; you need to note down all income and all expenditure.Income should be relatively straightforward, because it is, usually, the combined total of any regular wages entering the household. Expenditure, on the other hand, will take a week or two to compile, because while you can likely recall and predict most of your expenses, you need to account for every ad-hoc trip to the sandwich shop, meal out and cinema visit.Leave no stone unturned and be utterly honest with yourself about your spending habits.
Categorise your expenses
After step 2, you’ll probably be left with a big, long list of expenses. Inject some order into your budget by grouping expenses by category. They could be as follows:
- Council tax
- Utility bills
- Loan repayments
- Food shopping
- Credit card minimum fees
By categorising your expenditure, you’ll have a far better grasp on the areas in which you’re spending your money. You may also be surprised by which areas you’re favouring.
Calculate essential and discretionary expenses totals
Essential expenses are things like your mortgage, utility bills and council tax. You need a roof over your head and running water, so they’re a given. Once listed and categorised, add up your total monthly essential expenses.Do the same for discretionary expenditure. These include nights out, high-ticket but non-essential goods and cinema tickets; basically, the enjoyable but entirely optional things you choose to spend your money on.
Add everything up
Calculate your total income (for example, both your wage and your partner’s) and add your essential and discretionary expense totals together. You’ll end up with two figures – one which confirms the total amount of money entering your household, the other confirming its total outgoings.There’ll be a difference between the two. If you’re left with a sizeable surplus – fantastic. If you’re spending more than you’re bringing in, you need to do some work.
Attack your discretionary expenses
If you’re spending too much, it’s time to get tough with your discretionary expenses. Go through the list and cut out as much as you can. It’ll be painful at times, but console yourself with the fact that, by doing so, you’ll be avoiding the perils of falling into debt.
Stick to you’re new household budget
After step 6, you’ll be left with a new monthly budget for your household. Sure, you’ve had to remove some of life’s pleasures, but remaining debt-free is more important than those regular cinema trips.A household budget only works if you stick to it, religiously. Keep your budget by your side at all times and continue to record your expenditure. It’ll quickly become second nature.
Becoming the finance director for your home won’t always make you that popular with loved ones, but remind them that you’re doing them a favour. More surplus income is cash in the bank and cash you can pour into savings. Those savings will, one day, prove very fruitful for everyone.