How to Plan a Home Budget: A Comprehensive Guide

How to Plan a Home Budget A Comprehensive Guide

Why do you need a household budget? You need a household budget to help you manage your money, track your expenses, control your spending, pay off your debt and save money from your salary.

A budget is a key element of a strong financial foundation. A home budget provides you with a clear picture of what’s coming into and what’s going out of your bank account. This understanding helps you prevent your spending from going out of control.

If you already have a home budget, use this quick guide to update it. And if you don’t have a home budget at all, follow the steps mentioned in this guide to create one.

How to Plan a Home Budget?

  • Add Monthly Income
  • List all the income you earn on a monthly basis and total it up. If you add your spouse’s income, make sure it reflects in the budget.

     
  • Subtract Monthly Expenses
  • List down all your expenses, such as:

    • Credit card payments
    • Home EMIs
    • Other loan EMIs
    • Electricity bills and other utilities like internet bills, mobile bills, etc.
    • Monthly grocery
    • Living essentials
    • Insurance payments and other investments
    • Miscellaneous expenses

    Total these expenses and subtract them from the total income calculated in step 1. This comprehensive accounting helps you get a clearer idea of where you stand financially and helps you understand where your money goes. At this stage, you can consider using a budgeting spreadsheet or app to automate some of your recurring expenses.

     
  • Subtract Discretionary Spending
  • Discretionary spending refers to non-essential expenses like eating out, watching movies in theatres, etc. If you don’t keep a watch on your discretionary spending, it can accumulate to a larger amount by the end of the month. So, once you deduct the essential monthly expenses, continue to subtract the discretionary spending.

     
  • Save and Invest
  • After deducting the expenses, develop a saving and investment plans to park your leftover money. If you are not left with any money or your net income is negative, it means you are spending more than your income. Take this sign as the time to make changes in your spending habits.

     
  • Make Adjustments
  • If you are spending more than you are earning, you may end up using credit cards, taking loans, and borrowing money to make it through the month.

    The variable expenses you had listed down in step 2 are the easiest places where you can adjust your spending. Avoid eating out or watching movies in theatres. If possible, try to adjust your fixed expenses as well. For example, reduce your phone bill or cable bill.

    At this point, you should also evaluate your spending. What are your wants vs what are your needs - reduce your wants to make room for your needs.

     
  • Track Your Spending
  • All through the month, ensure that you track your spending against what you have budgeted. If you go over budget, figure out where you have spent more money. In the future, you can take greater care not to overspend in that area.

Start Saving For All Your Needs! 

Tips to Improve Your Financial Habit

Other than tracking your expenses and cutting down on unnecessary expenses, take the following steps to improve your financial habits.

  1. Increase Monthly Income
  2. If your total income is less than your expenses, it’s time to increase your monthly income. Some of the passive income ideas include:

  • Affiliate marketing
  • Rent your car
  • Advertise on your car
  • Invest in chit fund or stocks

You can also consider a side hustle, such as:

  • Freelance work
  • Side business
  • Part-time jobs on weekends
 
  • Implement Lifestyle Changes
  • Lifestyle changes that help you manage your budget include:

    • Using less power to reduce electricity bills
    • Buying products at a discount while grocery shopping
     
  • Reduce Debt Outflow
  • Your debt repayments should not be more than a third of your in-hand income. Work towards lowering your debt repayments to keep them at a manageable level. With the rise in income, don’t make the mistake of adding on more debt. Ensure that you save at least one-third of your net income.

    The purpose of a household budget is to summarise your income against your expenses to help you plan for long and short-term financial goals. Follow the above steps and prioritise your financial health by spending less and saving more.

    FAQ

    According to the 50/30/20 budget,

    • 50% of your income should be allocated to your needs,
    • 30% to your wants, and
    • 20% to your financial goals.
    Your financial goals can be saving or investing for a house, paying off debt, retirement or your child’s college expenses.

    To live on a budget, keep tracking your spending regularly to ensure you are within your budget and using your money according to the budgeted funds allocated to each category of expenses. The more you stick to your budget, the better you’ll be equipped to accurately predict how much funds you need to allocate to each category.

    Use an excel sheet template to track your monthly budget.

    • Create a column each for income and expenses
    • Enter your income and expenses

    The excel formula will calculate the difference automatically. This will help you avoid shortfalls or make savings or investment plans for any projected surpluses. For more on creating a home budget using an excel sheet, click here

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