How to manage a household budget

How to manage a household budget


Whether you’re working toward some big financial goals or just trying to make ends meet, a household budget is a must-have. A budget puts you in the driver's seat toward reaching your financial goals while also serving as a guide in your day-to-day spending.

Budgeting isn’t just important in your personal finances — it’s also an important part of your overall plan. If you’re just getting started, creating a budget can be challenging. But once you get past that initial hurdle, it will provide countless benefits to your finances.

Why is budgeting important?

You’ll find that budgeting can significantly improve your personal finances and even your overall life. While many people think of budgeting as restrictive, it’s actually the opposite. When you have a plan in place for your money, you have the freedom to direct your spending in whatever way you want and have money left over to reach your goals.

When you tell your money where to go instead of simply tracking your spending after the fact, you can feel good about your spending rather than feeling shame or regret when you’ve overspent in a particular category.

Finally, as we’ll discuss in the next section, a budget isn’t just beneficial for your spending. It can be an invaluable tool in your overall financial plan, helping you reach all of your goals without letting your spending hold you back.

Read more: How purposeful spending contributes to long-term happiness

Budgeting in your overall financial plan

Budgeting is important not only for your monthly spending but also as a staple in your overall financial plan. It allows you to make room for all of your other financial goals and priorities.

Take retirement planning, for example. When you’re planning your day-to-day spending, retirement may not be immediately on your mind. But it’s limiting your spending in other budget categories that allows you to contribute enough to your retirement accounts to help reach your retirement goals.

Similarly, suppose you are a new parent and want to pay for your child’s college education. If you’re like most people, this isn’t a decision you can make as your child is getting ready to head off to college. Considering a college education can easily cost six figures, covering this cost will require years of saving and planning. The budget you make today will impact your ability to reach this large financial goal that’s nearly two decades away.

While each part of your financial plan is important, your budget is what keeps everything else on track and helps ensure that you’re able to reach your goals in each area of your finances.

How to create and manage a budget

A monthly budget is a cornerstone in your overall financial plan, but getting started can be challenging. Here’s a step-by-step guide to creating and managing a budget:

  1. Calculate your income: This is an important starting point in creating your budget. Before you can allocate your spending, you must first know how much is available.
  2. List your fixed expenses: Your fixed expenses are those that don’t change from month to month. They likely include your rent or mortgage, your car payment, any student loans, and more. Because these expenses are fixed, you should add them to your budget first.
  3. Track your spending: Before setting spending goals for each category in your budget, it can be helpful to get an idea of how much you’re currently spending. You can do this by tracking your spending for a certain period or by looking back at your bank and credit card statements.
  4. Set spending goals: Based on your current spending, set spending goals for each budget category. These goals should be realistic while still ensuring you can reach your big-picture financial goals.
  5. Make room for other priorities: In addition to your spending, make sure to leave room in your budget for other priorities. These could include your short-term and long-term goals — everything from your next vacation to retirement.
  6. Review regularly: A budget isn’t a set-it-and-forget-it document. Instead, you’ll need to review your spending regularly to ensure you’re sticking to your budget. You should also revisit your budget on occasion to make sure it still fits your current lifestyle and goals.

Read more: Variable expenses vs fixed expenses: What’s the difference?

How to set spending goals

One of the most challenging parts of creating a budget is knowing how much to assign to each spending category. Sure, tracking your spending can show you how much you have been spending. But how do you know if you’re on track or if you should be spending less?

Several budgeting strategies can help you plan your spending. One example is the 50/30/20 budget. Using this method, you would allocate 50% of your income toward needs, such as housing, utilities, transportation, and food. 30% of your income would go toward wants such as entertainment, travel, and dining out. Finally, 20% of your budget would go toward your financial goals, including savings and extra debt payments.  

While the 50/30/20 budget isn’t right for everyone, it’s a good starting point when you aren’t sure how much you should be spending in each category.

Finding the right budgeting tool

One of the most challenging parts of creating your budget is choosing the right budgeting tool. If you prefer a hands-on approach, you could stick with the classic pen and paper (or a more modern version in a word document).

A step up from a simple budget document is a spreadsheet. This method is ideal for budgeters who prefer a hands-on approach and also appreciate having a lot of data and customization. You can either create your own budget spreadsheet or find one of many templates online.

Finally, you could use a digital budgeting tool to help you plan your spending. While there are many budgeting apps on the market, Empower allows you to combine your monthly budget with your overall financial plan.

When you log into your Empower dashboard, your monthly income and expenses are front and center. You can quickly see your monthly cash flow alongside other financial priorities. Then, when you open the budgeting tab, you get a more in-depth look at your spending for the month. You can connect your bank account, categorize your transactions, and take a closer look at specific spending categories.

Seeing this quick at-a-glance view of your finances, including a pie chart, can help you get a better handle on your spending and stick to your budget.

Additional budgeting tips

As you’re working on creating your budget, here are some additional tips that can help you.

Consider zero-based budgeting

A zero-based budget is a strategy of budgeting your entire paycheck down to zero. A zero-based budget doesn’t mean you spend all the money you bring in each month. In fact, it can actually help you reduce your spending.

Zero-based budgeting means you find a home for each dollar in your budget, whether that be spending, debt repayment, or savings. Not only does it force you to be intentional about where your money is going, but you may actually be less likely to go over budget because the excess funds have already been allocated to other goals.

Pay yourself first

A popular budgeting strategy known as paying yourself first is an effective way to build your savings. When you pay yourself first, you save before you spend rather than saving what’s left after a month of spending.

For example, let’s say you get paid on the first of each month. You might set up an automatic transfer from your checking account to your savings account on that day. The money immediately leaves your bank account, so you don’t have the opportunity to spend it.

Use sinking funds

Sinking funds are a budgeting strategy that helps you save for irregular expenses. When you set up a sinking fund, you set aside a certain amount of money each month for expenses that come along less frequently than once per month.

One common use for sinking funds is to save for uncertain spending. For example, you might set up a sinking fund to save for car repairs. You set aside some money each month so that when your car needs repairs, the money is there.

Another use for sinking funds is saving for annual expenses — it can be anything from your vehicle registration to Christmas. Determine how much you need to spend each year, divide that number by 12, and set aside that much each month.

Finally, you can use sinking funds to save for upcoming financial goals, such as an upcoming vacation. For example, if you know you’re going on vacation in one year and it will cost $1,200, you can set aside $100 per month in a sinking fund.

Leave room for miscellaneous spending

Even the best-planned budget will have some holes in it. Chances are that expenses will arise that won’t fit perfectly into any of your other budget categories or months will come along when you’ll go over budget in certain categories.

For that reason, consider setting up a miscellaneous category in your budget with a small amount allocated to it each month. It will help fill any gaps in your budget that can’t be covered by other categories.

Know that your budget can change

Your budget isn’t necessarily set in stone—it’s a living document that can and will change. First, know that your budget can change from month to month. There may be certain months when your spending will have to be higher in some spending categories. However, you can make up for that by lowering your spending in other areas.

For example, during a month when several loved ones have birthdays, you might spend more on gifts or eating-out expenses. However, you can cut back on other areas that month. You might decide not to buy new clothes that month. You can adjust your budget each month based on what’s happening in your life.

Additionally, your budget will almost certainly change over time. The budget that best fits your life today may look different from the budget that will fit your life one, three, or five years from now. Your spending needs may change. Additionally, inflation or increases in your income could lead to higher spending in some or all categories.

Separate needs versus wants

No matter what budgeting method you choose, it’s important to separate your needs versus wants. This can be more challenging than it sounds, but it can also go a long way in helping you reduce your unnecessary spending.

It’s easy to overspend in certain areas you’ve classified as needs when they are really wants. For example, food is clearly a need. We all need to eat. However, there’s a big difference between spending on groceries each week versus ordering takeout or eating out several times per week. Separating needs from wants is especially important if you’re going to use the 50/30/20 budget.

Read more: Everyday luxuries: Where are people overspending?

Prioritize retirement

It can feel unnecessary to make room for retirement in your budget, especially if you’re a young adult and retirement is so far away. But making room for retirement in your budget today is doing a huge wonder for your future self. The more you save in your younger years, the less you’ll have to save when you’re older. Retirement contributions when you’re young are more impactful and could even help you achieve early retirement.

Our take

With a 360-degree view of all spending and all income, you can focus on the most important part of responsible budgeting: helping ensure that you are saving more than you’re spending and considering how to invest your extra money.

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The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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