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Creating a Home Budget

In my last few finance Friday posts I've talked about home buying and our process because that's where my life is right now and that is my biggest financial priority but this week I want to back up and talk about something a little more basic - budgeting.

Although having a good budget is an important step it is also an ongoing process - we look at and tweak our budget every single month. The common approach for budgeting when starting from scratch is to spend a month or two tracking expenses and create a budget based on your spending with adjustments as needed. I actually disagree with this process and think the very first thing you should do is build your ideal budget. Actually I think everyone should have two ideal budgets - the long term of where they want to be and then the ideal for their current financial situation. I know the idea of budgeting can be very daunting so I'm going to break it down step by step as to how I budget. I personally find Microsoft excel to be the easiest tool but there are several online apps such as You Need a Budget that people seem to love.

Although you probably already have a good idea if not the exact amount of your monthly income I start off leaving that section blank but I do create a line for each source of income - we are a dual income household and my husband is eligible for bonuses each month. I also list savings before expenses because saving should be a top financial priority. If you believe in tithing you would also want to create a line for tithing at the top as well.

Monthly Income
Husband salary $
Wife salary $
bonus $
Monthly Savings $
Monthly Expenses
Mortgage / Rent $
Car Payment $
Student Loan $
Credit Card Payment $
Insurance $
Cell Phone $
Cable and Internet $
Memberships  $
Child Care $
Tuition  $
For expenses, start with the fixed expenses each month. If you are paying above the minimum on any debt just list the minimum required payment for now.  We do not have child care / tuition in our current budget but it is part of our long term ideal budget because we do want to start a family. Credit car payments are not part of our long term ideal budget - a big part of our budget focus is to make sure we are on track for that life goal.
Utilities $
gas $
groceries $
lawn care  $
household expenses  $
Next add in any mandatory but variable expenses - this will include things like groceries and gas. We just have a general line for household expenses for items like shampoo and dog food but you might want to break this category down more.

entertainment $
husband discretionary  $
wife discretionary $

Finally, add in the unnecessary spending that we all do each month and total up the monthly savings and expenses. Now go back and add in the income - how does it compare? Any money left over is money available towards debt repayment or savings - how do you feel about that number, is it enough to get debts paid off in a timely manner or save towards your goals? If the expense total is greater than income well, there's a problem and you are going to need to take a much harsher approach such as Dave Ramsey's Total Money Makeover.

At this point you might feel really good about your budget, or if I'm being perfectly honest you might feel really bad. Continue to adjust the non fixed expenses until you are comfortable with your monthly debt payoff / savings - this is your ideal budget. Now it's time to see how you do and spend the first month spending as normal and comparing to your budget - maybe you find that you already stay within budget and your ideal budget is realistic for your lifestyle but sometimes you might find that although your written budget seems perfectly reasonable you can't seem to keep it each month. When we first moved into our home this process helped us realize the problems we were causing by eating out too much.

A budget only helps if you stick to it so comparing your behavior to your budget and adjusting as needed is key to making your budget work. I think a common misconception is that you budget once and make it work every month but I find that to be too rigid - we look at our budget every single month and adjust based on our behavior and needs. Just as a personal example, we find that having our lawn professionally mowed gives us more quality time with each other on the weekends - but that comes at a cost so during the summer we need to be careful with our entertainment and grocery budget knowing that we have increased lawn care expense.

Whenever I think about things that we would like to do that we aren't doing currently I go to our long term budget - which for us is our budget with most expenses the same only no credit card or car payments and childcare costs. For example - we'd like to eventually build a pool in our backyard but when I play with the numbers we'd have to cut our spending beyond our comfort level to save for one in two years so the reality is that's not something we should consider without income growth but we also know we'd like to go on nicer vacations and that is reasonable in our ideal budget. Budgets don't just have to be about today or this month - they're a great tool for looking at your dreams and being realistic about what it will take to make them a reality.

I hope you found this post useful and even if you already had a budget it gave you something to think about in your own budgeting process. I'd love to hear any tips and tricks you've found for staying on track and meeting your financial goals.



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