It is commonly known that making a household budget is a wise step for financial success, but few take on the task of proactively planning for expenditures and tracking income. Some people have a general budget in mind, but even then they are missing out on what detailed planning can accomplish for the family finances. Let’s take a look at all of the budget categories and their considerations as a guide for financial preparedness and stability.
First, you want to identify your monthly income from all sources to get an idea of how much money you can spend per month. Next, gather receipts and bills to tackle the identification of your current expenses.
Identify the Costs of Necessities
How much does your rent or mortgage cost? Financial experts recommend that your total housing expenditure including any taxes and homeowner’s or renter insurance should not exceed 30 percent of your available funds.
Groceries are another necessary expenditure, but one that you want to keep under control through money-saving strategies. There are many coupon apps to try on your smartphone in addition to the traditional paper coupon variety, but Kiplinger.com notes that there are many other ways besides clipping or clicking on coupons to save money on groceries. One way is to avoid purchasing prepared foods such as pre-chopped vegetables or ready-made cupcakes and spend less money on the whole vegetable or recipe ingredients.
Another necessity is the means to get to work, school, and anywhere else you need to go. If you live in a large urban area with a solid transit infrastructure, your commuting costs could consist of bus and train fares. For most people, commuting costs entail a car payment, fuel, and automobile insurance. If you have the option of public transit, budgeting out automobile costs may make you reconsider taking the bus to avoid fuel and parking costs.
You should regard health insurance coverage as a necessary expense as well, even if you are a young single professional. There are high deductible plans available that can save you an incredible amount of money if you should ever have to be hospitalized in the event of an accident. Consider contributing before-tax dollars to a health savings account (HSA) as a proactive way to pay for health expenses in the future while saving on taxes in the present.
Start Building Savings
Make sure that your budget views saving as a necessity. Financial experts recommend saving anywhere from three to six months of salary in an emergency fund to be prepared for the unexpected. The next priority is to save for retirement. Since pensions are largely a thing of the past, it is crucial that you participate in your company’s 401 (k) plan and take advantage of any matching dollars they offer. If your employer does not offer a retirement plan, open up an Individual Retirement Account (IRA). Learn more about the creative ways you and your family can accumulate savings.
Make Smart Spending Decisions
The act of creating a budget and identifying where money is currently being spent encourages you to start making smart spending decisions. Budgeting can lead you to question whether subscribing to cable television is really necessary, and could start you on a quest to get a cheaper cell phone plan. Another expenditure you can track as a savings possibility is utility use. Many utility bills already track several months of usage so you can see the fluctuations in use. If usage spikes up, you can investigate the cause to bring your bill under control again.
Optional expenditures such as charity donations, entertainment, and vacations can get added to the budget as well, but they take a distant second to the essentials. It takes a significant chunk of time to assemble a monthly budget you can live with, but it is a great exercise in outlining your financial priorities and keeping them in focus.