Why keep a household budget?
Every company has an accountant (if she’s back from holiday, of course) who keeps an eye on both revenue and expenses in the business. Sometimes there is also a financial advisor who suggests the best solution to the current problem the business owner is facing.
They both want to achieve the same things you do. Make the right decisions and generate surplus cash. This is how smartly managed companies operate. You can take this to a personal level!
Unless you’re a multimillionaire, however, hiring an accountant to monitor the state of your family budget seems like unnecessary drama. You are able to do this on your own.
What will help you control your household budget?
- Earnings – the base from which you calculate how much you can afford or what you will have to give up. In addition to your regular salary, there are bonuses, overtime, performance bonuses, quarterly bonuses, selling old stuff on auction sites, extra work, tax refunds or whatever your income is.
- Fixed expenses – “sure things” like rent, kids’ extra classes, Internet, phone, TV bills, etc. This is the easiest part of the budget because you pay the same amounts every month. These will help you determine at least an approximate minimum cost of living. By the way, you will quickly check if all your obligations have already been paid.
- Regular expenses – similar to the previous group. This includes food or fuel for the car. You also incur these each month, but these are always different amounts, and you can only approximate them.
- Non-recurring expenses – charges that vary in amount each month but are not essential for daily functioning. These include eating out, cinema tickets, books, etc.
- Recurring expenses – expenses that you incur occasionally but are certain and usually occur in the same month during the year: liability insurance, car inspection, property tax, a birthday present for your wife, or underpayment for central heating. By keeping an eye on such costs, not only will you not forget about them and prepare the right amount in advance, but you will also be able to control their amount year after year.
- Savings – how much you have left over and what you want to set aside for a specific purpose. How about a holiday, a language course or a new car? In subsequent materials you will learn about why specifics are important in savings.
As you can see, a budget allows you to control many things that happen in your wallet even without your knowledge. A popular excuse for not keeping a budget is “after all, I know it all”. I’m confident that if I asked you a question about a specific area, you wouldn’t be able to answer.
There’s nothing wrong with that. First, because we are just getting started and you will soon learn about potential cash leaks. Second, you aim to get that data out of your head and into the most convenient tool possible. This data is not meant to overwhelm you and we’re not going to pinch pennies, because that’s not what this is about.
What is a household budget?
Contrary to popular belief, writing down expenses is not the same as keeping a household budget.
Household budget is a tool for monitoring your financial situation. It consists of planning earnings and expenses, monitoring them on an ongoing basis, and most importantly, analyzing and learning from them. It is only by pinning everything down in this way that rational financial decisions can be made.
Notice that I used the phrase “planning expenses”. A household budget is a plan for the future, not a passive record of the past.
What most people do is just write down expenses, which is not the same as keeping a household budget. It doesn’t lead to increased awareness of one’s financial situation.
Of course, entering receipts into an application or a spreadsheet is very important. It is this activity that allows you to determine how much you are actually spending. However, just listing costs will get you nowhere. You need more puzzle pieces to do this. We will look at each of these in more detail in subsequent materials. A good household budget will help you meet your financial goals faster and more effectively!
What should a household budget be?
Since you are using this material on the MultiLife platform, you probably have access to it through your employer. So there’s a good chance that part of your day you’re staring at Excel tables and the absolutely last thing you feel like doing is sitting down for hours on end to keep your budget.
With me, you’re not going to do that. I stick to a few rules that help me spend less than 15 minutes a month on my budget. Of course, you will learn the specifics in the next materials, but as a warm-up – the budget should be:
- Easy to use – choose the tool that suits you best: spreadsheet, program, application. Download, test, delete and try another solution. Your first choice is not always the best, and what others recommend may not necessarily be right for you. Each of us has different needs.
- Transparent – dozens of features may give you a sense of greater control, but they also litter the program, which is especially disturbing in mobile apps. Go for simplicity and you won’t give up after a week.
- Flexible – this is more about you than the tool. Budgets don’t always add up and this is perfectly normal. Don’t give up just because your assumptions fall short of reality. That’s what it’s all about! The budget is there to help you find what differs from your projections and respond accordingly.
That’s enough for today. I am well aware that many people treat keeping a household budget as an unpleasant chore. You will see that it is possible to do things differently, and I will not burden you with unnecessary knowledge, because it is not a complicated topic at all.
Until next time!
