When I’m talking with clients about mortgages, I frequently ask what they are comfortable with in a house payment. Sometimes people know what they can afford, other times they have never thought about it. Making a budget is a great way to prepare for home ownership!
No matter where you are in your homebuying journey, making a household budget is vital for a solid financial foundation. If you’re a current homeowner, a well-planned budget can help to control expenses, manage your spending, or pay off debt. It is even more important if you’re a potential homebuyer planning to purchase a new home.
Without monitoring your monthly expenses you might end up incurring debt or living off your credit card. Follow these steps to create a budget plan and work toward your long-term and short-term financial goals.
Assess Your Finances
Before you can plan a budget, you’ll first need to tap into your bank account and assess your current finances.
Evaluate Your Current Income
First, it’s essential to define the total amount of your income. Take a look at your recent bank statements and tally up all your dependable income sources, such as job earnings, alimony, or child support.
Irregular cash from occasional jobs or personal interests should not be a fixture in your income budget. Your budget should be a reliable financial document you can count on for financial planning.
Track Your Expenses
After defining your income, the next phase is to track your expenses. Start by monitoring all your current expenses. This will allow you to identify areas that demand the most funds and pinpoint opportunities to cut costs.
Begin by itemizing fixed expenses, which include recurring bills like car payments, utilities, mortgage or rent, and medical bills. Then itemize variable expenses, such as gas and groceries, which may change from month-to-month.
Identify Your Financial Goals
To begin organizing the information you have collected, first draft a clear list of your short and long-term financial objectives. Short-term goals typically take one to three months to attain. Examples of short-term goals include establishing an emergency fund or reducing credit card debt.
Long-term goals, such as saving for a new home, a baby, or an engagement, usually take longer to achieve. While goals may evolve, defining them can be a valuable motivator in sticking to your budget.
Create Your Budget Plan
Now that you understand your expenses and have set clear goals, you’re ready to create a budget plan.
Set Up Your Budget
First, list the short-term and long-term financial goals you have established. Then, take a look at your list of expenses and distinguish between essential and non-essential. Take your net income and deduct your expense list to determine what is left to put toward your financial goals.
If you find that the leftover amount available for your financial goals is insufficient, you will have to consider:
- Adjusting your short-term and long-term goal timelines
- Modifying your expense list
- Adding alternative sources of income
Monitoring Your Budget
Once you’ve finalized your budget plan, it’s important to monitor your progress in case you need to make adjustments.
Track Your Spending
To effectively manage your finances, you should monitor your expenses on a regular basis. Comparing your actual spending with your fixed budget will help you identify opportunities for adjustment. You may notice both overspending in one area or possibilities for further savings in another.
Adjust as Needed
Creating a household budget demands constant attention and effort. Has there been a shift in your employment status? Is there an upcoming addition to your family, such as a baby? As life circumstances change, so should your budget.
Set quarterly reminders in your calendar to check in with your budget and make necessary updates. When you reach milestones with your financial goals, be sure to establish new goals and celebrate your accomplishment.
Tips for Sticking to Your Budget
Here’s how you can stick to your budget:
Avoid Unnecessary Expenses
It’s important to make sure you are only sticking to the expenses listed in your budget plan. If it feels like there is a necessary expense that is not accounted for, update your budget to include this expense. If there is a non-essential expense that does not fall into your budget plan, you’ll want to avoid it.
Keep your financial goals top of mind when considering these unnecessary expenses. The sacrifice of turning away expenses should feel worth it when considering the goals you are working to achieve.
Accountability From Family and Friends
If your household includes multiple family members, be sure everyone is on the same page about your budget. Working together as a unit toward your financial goals will create accountability and limit conflict over financial decisions.
If you are a household of one, consider sharing your financial goals with close family members or friends. Having individuals that can hold you accountable for your financial plan can make it easier to stick to your budget.
Dealing with Debt
If you’re creating a budget in order to manage debt, consider some of the common methods for paying off your deficit.
Strategies for Paying Off Debt
- The Snowball Method: Pay off small debts first and then move on to the next lowest debt.
- The Debt Avalanche Method: Focus first on paying off debts that have the highest interest rates.
- Balance Transfer: Move high-interest credit card debt to a card with a lower interest rate. That can save you money on interest payments and allow you to pay off the debt faster.
- Debt Consolidation: Combine multiple debts into one loan with a lower interest rate. This will help you simplify your debt payments and make them more convenient.
Prioritize High-Interest Debt
Prioritizing high-interest debt means first focusing your debt repayment efforts on debts with the highest interest rates. This is important because high-interest debt can accumulate and become difficult to control if left unchecked. Prioritizing high-interest debt is a crucial step toward achieving financial goals and stability.
Final Thoughts on How to Make a Household Budget
Get into the routine of regularly tracking your spending habits. This will help you keep up with your budget and be ready to adjust it when needed. Keep your long-term and short-term financial goals top of mind and celebrate your success when you reach them.