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Money Mastery: The Necessity of a Household Budget

No one enjoys making a family budget… establishing a household budget can be stressful, time consuming and cause friction among family members with differing opinions on where to spend your limited resources. But unless you have unlimited money, budgeting is a necessary task to ensure you and your family keep your spending within your means. The fact that even celebrities and lottery winners have declared bankruptcy indicates that even if you have a very large disposable income you still need to live within your means.

Household BudgetIn order to efficiently organize a household budget, it is essential to be fully aware of your monthly income and expenses. It’s not pleasant to create a budget, but the benefits are worth the effort… here are some tips to get you started organizing your money and your life.

Organize to One Central Location

Your first step is to figure out how much income comes in every month. When you are first starting out this might be as simple as looking at the net income after taxes and other withholdings on your pay-stub. As life goes on, your income may get more complicated with stock income, bank CD interest, child support, self-employment or whatever other money comes in.

Next, you must meticulously jot down how much money you spend. This includes everything from food and housing to cable, phone, insurance, car payments, gasoline, clothing, entertainment, credit card interest, etc. It is very easy to underestimate these expenses so it is important to compare your initial estimates with actual expenses and see how your estimate stacks up. Don’t forget to include expenses like real estate property taxes or car registration that may only come once or twice a year. There are numerous websites that can help you organize this information into a fancy spreadsheet, or a simple pen and paper will also get the job done. Pull out your trusty calculator and begin to dive deep into your finances.

By writing or typing out your income and expenses on one sheet, you can visually see exactly where your money is going every month. This also allows you to be more aware of what kind of budget you need to set in place for your family.

Be Aware of Fixed and Variable Expenses

When implementing a budget, it is important to understand the difference between fixed and variable expenses that you may incur during the year. Typical fixed expenses include your mortgage, life insurance, and car payment i.e. they should be the same every month.

Variable expenses are those that fluctuate month-to-month like your gasoline bill and entertainment funds. It is also best to set aside money in case you need to repair a household appliance. By staying prepared for the worst, you will be able to handle any and all monetary issues that may arise.

After you subtract your expenses from your income, you are left with a balance that can be put towards your savings account. If you are not left with any money at the end of the month, it’s time to reevaluate your variable expenses.

Atlas Appliances Ltd of Calgary recommends that one way to cut appliance replacement costs is instead of getting a new dishwasher, or washing machine you can have the old one repaired much more cheaply. Other tips include, downgrading to a lower tier with your cable company… Cutting back on eating out… Carpooling to save gas… Installing a programmable thermostat (or manually adjusting) to reduce heating/cooling costs… Eliminating your land-line phone or replacing with a VOIP phone like MagicJack.

The Advantages of a Budget

By creating an effective household budget you can keep track of your expenses, and you will instantly know how your actual spending relates to your expected income. By being aware of your income and expenses on a daily basis, you can comfortably pay your bills on time and cover any unplanned costs without any month end surprises.

If you find that you aren’t able to pay all your bills every month you are living beyond your means. For instance if your credit-card bill is growing you are living beyond your means. And no matter how unpleasant it seems you need to reduce your spending somehow. Actually, if you carry a balance at all you are living beyond your means. You should be able to pay your credit card off in full every month.

By carrying a balance you are paying significantly more for your purchases than you have to. Imagine every time you went to the store and you had a choice you could buy an item for the marked price or you could choose to pay 10-20% more for the same item.  Would you choose to pay the higher price? No? But that is exactly what you are doing by not paying off your credit card balance. And actually it is even worse than that because the interest you pay on your balance is actually compounding so if you pay the minimum every month you will end up doubling the price of every item you buy.

So only way to live responsibly is to create a realistic budget that allows you to live on the actual net income you receive and covers all your fixed and variable expenses and allows you to pay off your credit-card in full every month.

Of course if you’ve run up large credit-card bills in the past,  you need to find a way to get them down bit-by-bit. A good option might be to join a support group like Dave Ramsey that will show you how to systematically eliminate those bills and help you stay on budget.

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