How to Create a Household Budget
Before I even talk about the steps to create a household budget, let’s briefly look at three reasons why a budget helps you feel less overwhelmed and more in control of your life.
- A budget is an intentional plan for your money. When you make a plan for your money, you can be intentional about spending it on what matters most to you.
- A budget helps you feel empowered about your money. When you’re NOT in control of your money, it’s easy to feel overwhelmed and worried about money because you don’t know where your money is going or whether you have enough money. Read more about how you can ease your mind when you’re stressed about money.
- Your dreams probably need some magical money dust to make them come true. Think of your budget as your fairy godmother in disguise.
Steps to Create a Household Budget
A budget is a tool which holds the power to change your life. But figuring out how to create a household budget can feel overwhelming in itself, that’s why I’ve broken the process down into simple steps. Do one step a day or tackle them all in one day. Just follow these simple steps to create a household budget, and you will discover what a budget can do for you.
(Tip: If you’re married, do these steps together and share this article with your significant other. The first step helps spouses finally work together toward a common goal.)
To make it easier for you to follow along with the steps, print off a copy of my Monthly Household Budget Planner. It’s FREE, and I’ve designed it so you can customize it to fit your needs and use it month after month to create a household budget that will help you live more intentionally.
Step 1: Dream
Yep. Creating a budget that works for you, starts with dreaming. So what do YOU want your money to do for you? What are your goals in life? What is most important to you?
Do you want to stay home with your kids? Start a business? Travel? Provide a sense of financial security? Pay all of your bills each month? Do you want to reduce or eliminate your debt?
Write down your dreams, and prioritize them. You’ll be keeping them in mind as you budget. Your budget really can help your dreams come true.
Step 2: Figure out what budgeting system you would be most comfortable using.
- A paper and pencil budget form is a great place to start to create your household budget for the first time. You’ll be doing a lot of rearranding categories and amounts when you’re starting out. A paper version is very flexible for working out those details. You can then move it over to a digital budget or keep using the paper version. My Household Budget Planner is flexible enough to get you started, and you can easily print a copies each month to create your own personalized budget planner. Sign up here to get it.
- For an online budgeting tool, we have used Every Dollar and have liked it. The basic version is free. When you pay for the premium version, you can even link your bank accounts. This allows you to drag and drop transactions to track your spending. It does make budgeting and tracking expenses fairly simple.
Step 3: Put giving and savings in first.
Remember a budget’s purpose is to spend your money intentionally. If you want to save up an emergency fund, put it in there FIRST, because it is a priority.
If you want to intentionally give to your church or another cause, create a budget with it in there now. Budgeting is all about making sure you spend your money on your top priorities. (Not on those impulse buys when you’re tired, hungry, or frustrated.)
Step 4: Gather bank and credit card statements.
Next find all of your bank and credit card statements for the past 2 or 3 months, or know where to get all of them online. Get it done, and Step 4 is checked off. Now you are almost halfway through the steps to create a household budget!
Step 5: Pay for your basic needs first.
We are talking basic needs here: food, water, shelter. To create a budget, put those needs in next. They include mortgage/rent, electric, gas, water, trash, phone, and groceries. Use your bank and credit card statements to give you an average of what the utilities will cost you each month. You can use receipts and statements to help you calculate your grocery bill or you can just decide how much you want to spend on groceries. (I recommend between 5-15% of your take home pay.)
All of these are the basic living expenses and are always paid before other bills. Keep in mind you may be able to reduce how much they cost you though.
Step 6. Now add in other monthly expenses
All of the budget forms I mentioned before, give you detailed examples of budget items. Now take some time to figure out if they include all of your expenses. An example is a fund for children’s activities/lessons. Not everyone will have that budget item, but try to remember the budget items unique to your life. You want to include everything, so you create a budget that works for you.
I’m going to be honest with you. You will probably forget to include something at some point in your budget. When it happens just adjust your budget for the month, and keep working at it. It usually takes about 3 months to start feeling confident in your new budgeting skills. So don’t give up if you make a mistake. You are learning something that has the power to change your life. It is worth sticking with it.
Bonus Motivational Challenge:
If you have ever thought about reducing your debt, I want you to try this challenge. At this point, you should have all of your monthly expenses in your budget. I want you to go ahead and add up all of your monthly payments for your debts (car loans, student loans, credit cards, etc.).Don’t include your mortgage payment at this point, if you have one.
Take a look at that number. That is how much extra money you would have each month, if you didn’t have debt! What would you do with that much extra money in your budget each month!? Travel? Save for retirement? What dreams would you put some or all of that money toward?
If you want, add your mortgage payment to that number. This is how much extra money you would have each month if you were completely debt free!
When my husband and I looked at these numbers when I was working full-time, we realized I was working to pay for our debt and our big mortgage payment. We decided to make some drastic changes so I could be a stay at home mom. We are now debt free, except for our mortgage! Being debt free has allowed us to live the life we want to live! Read more about how our budget helped me become a stay at home mom.
Still feeling excited after doing the challenges above? Great! Keep holding on to that feeling! Feeling mad at all this debt? Good. You can use that, too! You can’t make lasting changes without getting your emotions involved. Use them to get motivated to create a household budget that helps you get out of debt and allows you to put that extra money toward your dreams!
Step 7. Figure out your monthly take home pay.
Look at your pay stubs or your bank statements to figure out your take home pay for the month. That is your monthly income. Put that into the budget.
Step 8: The moment of truth.
It’s time to add up all of your expenses, including your debt, to figure out your monthly expenses. Subtract your monthly expenses from your monthly income. You’ve just created a budget! Now one of two things just happened.
Yes! You have more income than expenses.
This is what happened to us when we decided to really take control of our money for the first time. It felt amazing! Take a look at your dreams again (from Step 1). What do you really want to do with your money? Maybe save back an emergency fund or pay off debt?
Put that extra money toward your dreams, and you are on your way to a better financial future.
Oh, no! Your expenses are more than your income.
I know. It sucks! I’ve been there. When a financial crisis hit our family, I was staring down at a budget that had far too many expenses and not enough income. I don’t think mad is really a strong enough word to describe how I felt then, but I took all of those feelings and channeled them into fighting to make our budget work.
So here is what you do. Go back through the categories that are extras. Examples include: pocket money, entertainment, restaurants, etc. Use your priorities to help make decisions and reductions in those budget items. What is more important, your dream or the money category? Example: What is more important, getting out of debt or eating out more? Being a stay at home mom or more pocket money?
Keep working at it until your expenses and income are equal (AKA: a zero based budget). You can do it!
Step 9: Track Your Actual Expenses
Congrats! You have a budget! Update your budget each month, and track your expenses each month to make sure you are sticking to your budget. Each month will get easier to create a household budget.
Use your dreams as a motivator to keep on track and sure enough magic will happen. Once you get intentional about your money, other parts of your life will come together as your whole life becomes more intentional.
The Household Budget Planner has 10 pages to help you be intentional with your money, including intentional planning pages, monthly budget sheets, free expense tracking form, and budget category ideas.