How to make a household budget

Learning how to budget is a great way to help reduce financial anxiety. It not only improves your financial health, but it can also be incredibly empowering—not to mention rewarding. Maybe you’ve tried to budget before and got discouraged, or maybe you’re totally new to the idea. Don’t worry—anyone can create a budget. The trick is to take it one step at a time. Here are a few tips to help you get started.

The first step to effective budgeting? Figuring out exactly how much money you have after tax. This number will be the framework of your budget, so it’s important to calculate it correctly. If you have a regular salary, don’t confuse your gross income with your net income. Your gross income is your income before tax. Your net income is the amount that actually enters your bank account after tax has been deducted each month. It’s your net income that you need to focus on here.

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If you’re a freelancer, calculating your net income can be a little trickier. If your income varies from month-to-month, gather as many invoices as you can and calculate the average. However, be sure to subtract any tax, health insurance, and social security payments that you make either on a regular basis or after you complete your annual tax return. Once you’ve deducted these numbers, you’ll be left with your average net income.  

Your net income isn’t always limited to your salary or freelance work. Include any additional income streams in your net figure. This could be:

• Government stipends
• Rental payments, if you’re a landlord
• Streams of passive income (e.g., from an ebook you’ve published, an online course you’ve created, or any other sources of revenue you have)

When creating a household budget, it’s a great idea to start a budgeting spreadsheet. Here, you’ll note down all of your income streams and everything you spend money on. This helps you keep on top of your finances and stay on track with your budgeting goals. It’s simply too much to try to keep track of everything in your head each month! 

Now that you know all of your regular income streams and your monthly net income, it's time to note them all down into a designated budgeting spreadsheet. Make sure the total net figure is clearly written, because you’ll need to refer to it after the next step.

This step can be time-consuming, but it’s essential if you want to reach your financial goals. It’s time to face the reality of your spending habits. A good place to start is by looking at your monthly bank statement. Read through every outgoing payment that leaves your account. The more monthly statements you can analyze, the better, as they give you a more thorough picture of your financial health. For example, many regular payments occur quarterly or even annually. You may miss these if you only focus on a single month.

Input the expenditures from your bank statements into one of two columns in your budgeting spreadsheet: one for variable costs and one for fixed costs. Variable costs cover all of your non-essential expenditures that may be easier to adjust. This would include money spent on eating out, most groceries, subscription services—anything that isn’t an absolute necessity. Fixed costs are your essential expenditures that are harder to change. These include your rent, any debt repayments, and your utility bills. Once you’ve added all of your expenses to these two columns, tally them up and work out how much you spend on average per month in both categories.

The moment of truth. Now that you know how much money you have coming in each month and how much you have going out, it’s time to see what, if anything, you have left over. This means adding your variable and fixed costs together and subtracting this figure from your net income. If you have some cash left over, that’s good news! It means that you’re already spending within your budget. However, if you’re spending more than you have coming in each month, don’t worry. This is what budgeting is all about—getting to grips with your finances and identifying how to improve your financial health. More on this in the next step.

Now you’re fully aware of your financial situation, you’re ready to set up a realistic household budget that matches your needs. There are plenty of budgeting methods to choose from out there, but we’ll focus on two smart approaches for those just learning how to budget: the 50/30/20 budget and the pay-yourself-first budget.

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Invented by U.S. senator Elizabeth Warren as a way to help individuals get out of debt, the 50/30/20 budget is an accessible, simple method for organizing your finances. It works like this:

• 50% of your net income is allocated to your ‘needs’—i.e., your essential costs such as rent and utility bills (these tend to be your fixed costs).
• 30% of your net income is allocated to your ‘wants’—i.e., your non-essential expenditures such as your gym membership or Netflix subscription (these are usually your variable costs).
• 20% of your net income goes towards paying off any outstanding debt. If you’re not currently in debt, then this money goes towards your savings.

As you now know the status of your monthly cash flows, you’ll have a clearer idea of how much money you can start allocating to your monthly savings. Once you’ve decided on a figure, the pay-yourself-first approach encourages you to automate your savings payments so that when your income hits your account it’s immediately moved into your savings account. This prevents you from dipping into your savings, helping you reach your savings goals. It also stops you from overspending during the month as you can see exactly how much money you have left to spend at any given time.

Whichever budgeting method you choose, it’s important to have an idea of how much you want to save each month. Depending on how ambitious you want to be, there are several ways you can start making some serious savings each month. The first thing to do is to go through your list of variable costs and identify areas where you’re overspending or could cut back. This could include limiting how often you eat out, canceling subscriptions, or giving yourself a weekly grocery limit.  

In general, it’s much easier to focus on your variable rather than your fixed costs as they’re likely easier to adjust. But, if you want to increase your monthly savings more dramatically, you can tackle your fixed costs too. This will mean finding ways to cut back on your rent, gas and electricity costs, and car insurance. You can also consider picking up some additional streams of income such as taking on more freelance work to help boost your monthly savings.

Similar to the pay-yourself-first budgeting method, automating your savings each month helps you stay on track with your budget. Once you know how much you want to save monthly, set up an automated payment from your current account to your savings account that sets aside that figure for the month. It’s best to time this with when your income enters your account. This way, it stops you from going overdrawn if the automated payment is processed near the end of the month when you’re low on funds. It also prevents you from eating into your savings and means that you don’t have to think about moving your savings across each month as your bank does it for you instead. 

It’s important to check your budget regularly to make sure it matches your lifestyle and your priorities. Your budget should be a reflection of where you’re at and where you want to be—it shouldn’t be a source of anxiety for you each month. Make sure your budget is working for you, and not the other way around. If you’re finding it difficult to meet your savings goals each month, then adjust the numbers so that you put away slightly less on a monthly basis. 

Below, you’ll find all the components of a standard household budget: 

1. A breakdown of all income streams after tax (including regular salary, income from freelance work, any income from government stipends).
2. A detailed list of all monthly fixed costs (including rent, utility bills, car insurance).
3. A detailed list of all monthly variable costs (including money spent on groceries, nights out, subscription services).
4. The total sum left after your fixed and variable costs are added together and subtracted from your total net income.
5. Taking this calculation into account, settle on a projected amount that you’d like to save each month, based on the above calculation.
6. A list of any variable costs that you’d either like to cut down on or eliminate altogether. If you want to make some more drastic savings, consider cutting down on some of your fixed costs, and/or bringing in another stream of income.
7. As you’ll check your budget at least once a month, you’ll be able to keep track of how often you’re either reaching or missing your savings targets.  If a pattern arises over time, it’s time to make some adjustments. If you’re regularly hitting your target, it might be time to increase how much you put aside each month. If you’re missing your target, it might be worth readjusting your savings goal until you can start saving this amount more easily.

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