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If you are new to budgeting and wondering how to start a household budget, you’re in the right place. First of all, congratulations on taking this important step! Budgets might sound drab, restrictive, and no fun at all, but my hope is that you’ll soon start to see your budget in a different light. 

As you work with your budget month after month, I’m confident you’ll see how your budget is empowering. By spending according to a plan, you’ll feel great about making progress toward your financial goals, and you’ll feel better about the money you do spend.

That said, I realize that creating your first monthly budget can be a little intimidating. It’s math, first of all. And it’s highly personal math. It’s natural to feel some degree of anxiety, fear, shame, guilt, and a whole host of other emotions. So we won’t neglect that emotional component in the steps below. In fact, that’s what step 1 is all about.


Step 1: Get clear on your “why”


Why do you want to start a monthly budget? Are there financial goals that you want to reach? Perhaps you want to get out of debt. Or perhaps you want to save for a downpayment on a house or for retirement. You may just want a budget so that you can spend your budgeted money guilt-free on the things that make you happy.

For me, I got serious about budgeting when I was pregnant with my son and needed to make sure that my self-employment income would be sufficient to support our growing family. I didn’t have a company paying me maternity leave, so I needed to make sure we had enough set aside not only to pay for all of those new baby expenses, but also to cover all of our regular expenses while I wasn’t able to work as much. My son was my primary “why.”

Articulating your reasons for budgeting is an important part of making sure you stick to your budget. And those reasons will change as your financial situation changes. 


Step 2: Learn the general elements of a household budget


Here’s where things get a bit academic, but I promise the math isn’t actually that complicated. Here are the terms we need:

  • Income: All of the money you bring in during the month, whether through your paycheck, through self-employment income, or through random things like a garage sale
  • Savings: This is money that you set aside for a future purpose, whether that be your retirement, something you are saving up to buy, or money you’re saving to use in some future emergency.
  • Debt: These are payments that you are required to make to pay back what has been borrowed. Car loans, student loans, and payments toward credit card debt go here.
  • Expenses: This is a big category for all the things you spend money on. But there are a few ways to break expenses down into different types of expenses.


Types of Expenses


Within expenses, it might be helpful to think of these subcategories:

  • Fixed Expenses: These are the bills you can count on each month, like your rent/mortgage, your phone bill, or your water bill. This might change a little from season to season, but they might be super predictable month to month, down to the penny.
  • Variable Expenses: These are the bills that fluctuate a lot or that are more discretionary. Expenses like groceries, eating out, beauty, gas, and entertainment fall into this category.
  • Irregular Expenses: These are expenses that only come up once in a while, like car maintenance, medical expenses (at least in an ideal world), Christmas shopping, etc. You may find it helpful to create sinking funds for these expenses.

The basic math formula you will be targeting for your budget goes like this:

Income – Savings – Payments to Debt – Expenses = 0

In other words, if you take your income and subtract out all of the ways you are using your money – including by putting it towards your savings goals – it should equal out to zero. You should have every dollar accounted for and assigned a purpose.

But how do you know what numbers to assign to what categories?


Step 3: Get a general picture of your past few months


First, it can be helpful to look backwards. Gather your bank and credit card statements. Grab some coffee. And then as best you can, without spending too much time on it, try to list out meaningful categories for the money you’ve spent.

For any expenses that are recurring, make note of the amounts. How much is your internet, your student loan payment, your mortgage, your phone bill?

For anything that is less clear, get a general sense of how much is probably going to which categories. Is there a lot going towards eating out? A lot spent at Target? (What’s your sense of whether those Target runs were mostly food, clothes, household goods, etc.?)


Step 4: Draft out your categories


Start creating a list of the ways you want to categorize your spending.

Here are some common categories you’ll likely want to include:

  • Mortgage/Rent
  • Utilities (or break it down even smaller by listing them out individually)
  • Groceries
  • Eating out/delivery (or combine with groceries into a “food” category)
  • Household items (or combine with groceries if you don’t want to track them separately)
  • Medical expenses
  • Childcare
  • Transportation
  • Clothes
  • Gifts/holidays
  • Personal spending money/fun
  • Miscellaneous (because we can’t predict everything, nor should we categorize everything)

Don’t obsess over this part, and don’t expect to get it perfect right out of the gate. You can make changes as you go. Personal finance is personal, and it can be a learning experience to find out which categories are the most meaningful to you.

Our family, for example, has coffee as a separate line item in our budget. We started that when my husband and I needed to take turns escaping to the coffee shop to get things done. (It’s hard to work from home with a baby/toddler.) For those months when that wasn’t an option, keeping coffee as its separate category allowed us to see how much we were saving by making coffee at home.

Don’t forget to include payments toward debt in your emerging list. Write down your minimum payment amounts for each debt, but also consider whether you want to be paying extra toward any of them.


Step 5: Track your spending


Now it’s time to test out the categories you’ve defined for yourself. You may not be ready just yet to give yourself a spending limit for some of the categories, and that’s fine. For the next month or two, just focus on tracking where your money is going.

Use a notebook, a spreadsheet, a note saved on your phone, whatever works. The specific tool you use isn’t as important as your consistency with it.

One goal of this stage is to get more clarity on what your current spending habits are. The picture you got when looking back at your bank statements was likely incomplete. It didn’t include cash spending, or that Amazon gift card you used up. You also wouldn’t have been able to divvy up how much went to which categories at places like Walmart or Target.

Another goal of this stage is to test your categories. Maybe you originally wanted to keep groceries separate from health and beauty items, but in trying to track that information, maybe you’ll realize that the distinction is more trouble than it’s worth to you. Or maybe you’ll discover a category you didn’t think about before.


Step 6: Set savings goals


Once you have a better sense of where your money is currently going, it’s time to start thinking about where you would actually like it to go.

Here are some ideas to get you thinking:

  • Saving for retirement
  • Adding to your emergency fund
  • Paying extra toward debt
  • Saving up for a car/house/trip
  • Saving for a child’s education
  • Donating to charity

It can be tempting to try to do all of these at once, but in reality, we want to be strategic about it. Choose just a couple of goals, then predetermine how much you will set aside for these goals each month.


Step 7: Put it all together


Once you have a clear idea of your income, your typical spending (and the categories it falls under), and your financial goals, it’s time to put it all together.

Draft out a plan for the next month that anticipates the amount of income you will receive. Then, using your data from previous months as a guide, start drafting out the target amounts you’d like to spend in each of the categories you thought through before.

My suggestion? Start with your savings goals. Try out an amount that you’d like to put toward those goals each month, and then see if you can get the rest of the math to work.

In order to put as much to your savings goals as you would like, you may need to trim a spending category or two. Look for categories that made you uncomfortable when you first figured out how much you have been spending on them each month. Is there room to trim that expense a bit? Make sure you’re still being realistic, though.

Step 8: Adjust


Your budget won’t be perfect right out of the gate. You’ll underestimate one thing, overestimate another, and sometimes an expense will come up that you just plain forgot to budget for. When that happens, it may be tempting to abandon the whole endeavor, telling yourself that budgeting just doesn’t work. But I encourage you to instead look for ways to improve your budget (and improve your spending habits) so that you can be closer to your budget next time.

You’ll also want to adjust your budget whenever something in life changes. Perhaps you move jobs, or move to another city. Or perhaps you welcome a new child into your family. Or maybe it’s just that groceries are costing more and more these days, and so you really do need to up the amount that you devote to groceries in each budget. Expect to make adjustments.


Final thoughts


Once you’ve accomplished all of these steps, congratulations! You now have a robust household budget! Or even if you’ve only accomplished a few of these steps, congratulations on the newfound knowledge of your finances.

I do know, though that intellectually knowing the broad-stroke steps for how to start a household budget is different from actually knowing how to move forward in your own particular case. If you’d like support with starting your own budget, please know that I offer pitch-free complimentary coaching sessions. I’d be happy to help.

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