Managing your household budget
26 April 2023
A household budget can have a big impact on your life
Trying to manage finances without a budget is like trying to get to a destination without knowing where you are starting. It’s impossible! No matter how you create a personal budget (using a budgeting app, excel spreadsheet or a notebook) you need some way to determine where your money is going each month. The trick is to find a way to manage your finances that works for you.
The following broad steps can help you create a budget and kick start your money management journey.
Set your goals
Before you start identifying all your incomings and outgoings, make a list of all the financial goals you want to achieve, for both the short term and long term. These goals aren’t set in stone but it will help if you know your priorities before you start a budget.
Short-term goals should take no longer than a year to achieve. Long-term goals, such as saving for retirement, the perfect home or children’s education, may take many years to achieve.
Note your net income
Identify the amount of money you have coming in. Make sure to use your net income (your take-home pay). It is important to note how constant this income is and what might cause it to vary on a monthly basis.
If you have freelance or part-time roles, it is important not to overestimate what your monthly income is. Use the amount from a low-income month when setting up a personal budget. Any additional income in a month can be used to grow savings faster.
It is also good to identify other potential sources of income (i.e. social welfare benefits, retirement income and child benefits) and can you convert a hobby or talent into a way to supplement your income?
Knowing your expenses
It is important to create a detailed account of all the places you are spending money. The more detail that is used, the easier it will be to implement money management and identify where changes can be made.
Start with going through your bank and credit card statements to identify and list all fixed expenses: regular monthly bills such as rent, car payments and utilities. It will be difficult to cut back on these but understanding how much of your income is assigned to these is important.
List all variable expenses: these may change from month to month such as groceries, mobile phone and entertainment. Here you have opportunities to cut back.
Ways to make your money go further by managing the day-to-day
Use the variable and fixed expenses you compiled to help get a sense of what you’ll spend in the coming months. This will help predict how much you have to budget for. Your past few months spending habits will guide you when trying to predict variable expenses.
Once you’ve done all this, you have what you need to complete your budget. This will help you see where you have money left over each month or if there is too little left over, where you can cut back.
The money left over can be put towards your goals and savings. If there is too little left over, you can either postpone certain goals or reduce some spend (small savings can add up to a lot. Don’t overlook the little things). Such decisions come with big trade-offs, so make sure you carefully weigh up your options. You need to be able to commit to the budget.
Set out your savings objectives
Make sure you note all the areas where you currently save and determine the other areas you want to save for, based on the goals you set out. Don’t be too concerned about the value you will be saving on a monthly basis. This will be based on the amount of money remaining after paying for all your expenses. The savings categories should be detailed. This will help you decide on what has to be sacrificed or what is essential.
Savings should also include items such as car insurance and other once off lump sum payments. This will help you manage your money without unexpected shocks.
Saving up for an emergency fund is a good idea to have some money tucked away for unexpected expenses, so you don’t have to stress about where the money is going to come from.
Keep checking in
Review, review, review. Very little is set in stone. Income may increase. Goals may change.
Regularly checking in on your savings goals and readjusting your budget to suit your current situation is important to ensure you are on track. By keeping an eye on your savings, it can help you stay motivated, make informed-decisions and make the most out of your money.
Follow the steps above and find a routine that suits you.
10 reasons to have a household budget
It’s no secret that having a household budget is a good idea – here are 10 reasons why a budget will help you manage your finances and improve your money management:
- Gives you control and power over your money – a budget makes sure your spending and saving is intentional. It helps you decide if you want to sacrifice short term perks (that extra treat each day) for long term benefit (a special holiday).
- Keeps you focused on your money goals – avoid unnecessary spend to be able to afford things that are important to you.
- Makes you aware of unnecessary spend – a budget makes you aware of money coming in, how fast it goes out and where it is going. It allows you to cut out spend that may not have been recognised before.
- Helps you allocate money to savings – by understanding what the monthly spend needs to be it is easier to see how much can be saved, and what items need to be saved for (car insurance, home repairs).
- Helps you decide as a household how the money will be spent – a budget allows everyone to decide on what is needed in advance and agree how money will work for everyone.
- Allows you to be prepared for expected and unexpected costs – budgeting allows you to plan to set aside money for emergency costs.
- Provides you with early warning for potential problems – by taking a big picture view, you will see potential problems in advance.
- Helps determine what financial support you may need – when you understand your financial situation, it is easier to see what other support you need.
- Determine how much debt you can take on – budgeting shows what repayments you can realistically afford.
- Gain extra money – In budgeting, you get to identify and eliminate all unnecessary spending like the app subscription you no longer use, late fees, etc. These seemingly small saving can add up over time.