Creating a Home Budget

Creating a home budget is essential for keeping your finances and sanity in check. In order to create a functional budget, you have to be honest with yourself about the amount of money coming in and out- keeping a log of money spent is a good way to see where your money is going.

The first step of creating your household budget is to list all of the household income. One can do this with a simple notebook and pen, a computer program such as Excel, or an online budgeting tool that can be found by a simple keyword search. Be sure to account for all sources of income including, job salary, an unemployment or government benefits, alimony, child support, etc. Once you have all of your income sources listed, add them up!

The second step of creating your budget is to add up all of your expenses. This is the area that tends to be a true realization to people- seeing all of your expenses written out in front of you can be a true eye opener. It is important to remember all of your expenses- mortgage/rent, car payments, all utility payments, food, entertainment, etc. In addition to these obvious expenses, it is ideal to also list your smaller purchases- spending $3 a day on that coffee you grab on the way to work? That’s $15 a week,  $60 a month, or $720 a year!  Being honest with yourself will help you to create a true picture of your financial situation. Once you have all of your expenses listed, find the sum of them. Take the sum of your expenses and subtract that from your monthly income. Hopefully, your income is a lot more than your expenses.

Another necessity for any home budget is an emergency fund. When you’re taking care of a home, things break, appliances age, roofs leak and the unexpected can occur, well- when you don’t expect it. It is important to keep an emergency fund for these occurrences. While there are several theories on the amount one’s emergency fund (ranging from a total of three months worth of expenses to a year’s worth), starting with a small, obtainable goal is a smart decision. Once you have your monthly expenses subtracted from your income, you will see how much money you have left over. One should take a percentage of this money and put it into an emergency account, which is kept separate from you’re spending money, but that will accessible when it is needed.

While earning more than you spend is usually the goal, many people realize that their earnings do not always support their spending habits, but by seeing your spending tendencies on paper, it will help you figure out where to save money. Many utilities (cell phone, cable, internet), along with insurance (both home and auto) are competitively priced and by simply making phone calls to these companies to compare prices, one can save several hundred dollars per year. Lastly, another budgeting tip that works well for a lot of people is to use cash and avoid debit and credit cards. Using cash tends to make you more aware of what you’re spending, instead of mindlessly swiping a card for daily incidentals.

While creating an honest and true household budget can be a scary task, tackling it will help you realize your financial state and hopefully change it for the better.

Kent Smetters

Kent Smetters is the Boettner Chair Professor at The Wharton School of the University of Pennsylvania, the Interim Faculty Director of the Penn Wharton Public Policy Initiative, and a Faculty Research Fellow at the NBER. He was the former Deputy Assistant Secretary of the U.S. Department of the Treasury, and he subsequently served as a member of the U.S. Congress’ bipartisan Blue Ribbon Advisory Panel on Dynamic Scoring. Kent holds bachelor degrees in Economics and Computer Science from The Ohio State University as well as an MA and PhD in Economics from Harvard University. He previously cofounded a national registered investment advisory firm that built a new technology platform, grew the firm to over 50 advisors and then sold the firm to a large, publicly-traded company. Growing up in a financially poor family, Kent donates his time to “Your Money” to help families work, save and set goals in order to achieve the most in life. Kent is often cited in major news outlets.