The Basics of Working with a Home Budget

For some people words like 3 in 1 credit report and “budget” are ugly financial monsters designed to suck all the fun out of life. It’s safe to say that’s an over-reaction. A budget is actually a useful tool to:

•         Show you where your hard-earned money is going.

•         Help you get control of your cash flow.

•         Meet goals like paying off a debt (like student loans) or making an important purchase (like getting your first home.)

•         Keep useful records for tax and other purposes like applying for a home improvement loan.

How to Start

The first step in setting up a budget is to gather the financial information you need to figure spending limits and savings goals. You can do this is one of two ways:

Assemble all your bills for the past 12 months.

a.) Add the totals and divide by 12 to figure out an average amount per item.

b.) Evaluate the items to see if anything is more seasonally expensive. For instance, does your electrical bill run higher in the summer when the need for air conditioning is greater?

If so, you will need to adjust your cash flow accordingly in whatever month the bill begins to go up. (Note that many electrical companies offer “average” plans to help you offset these fluctuations. Your monthly usage is figured into a running average and your bill total is set accordingly.)

Assemble three months’ worth of bills and run your averages based on the totals.

While this methods is easier in terms of finding the information, it will not show you seasonal fluctuations. You will need to watch your incoming bills closely and adjust your budget accordingly.

Budgets Grow More Effective Over Time

Note that any budget will become more accurate over time as “real” numbers are plugged in. You will also have a better feel for how to plan for incidental expenses. Always try to have some kind of “miscellaneous” or “emergency” amount set aside for those times when the kitchen sink backs up and you need to call the plumber. (You will also tend, over time, to incorporate expenses you did not figure in to your original amounts because you simply didn’t think of them.)

There are numerous software packages that will help you to establish a basic household budget. The most popular are Quicken by Intuit and Microsoft Money by Microsoft. (It is also possible to use a spreadsheet program like Excel to figure the basic calculations.)

Use the Budget as a Tool

Overall the goal of any budget is simple and utilitarian. You need to know what comes in and what goes out and not to let the outflow exceed the inflow. This is especially crucial in trying to get on top of a debt, like those balances that tend to pile up on credit cards. Discipline is key. If an item is not on the budget and you have no usable excess of funds that are not needed elsewhere, don’t buy it. If you think of your budget as a tool that will help you meet your goals the limits you set for yourself will be a means to an end, not something you see as a punishment or burden.