How to make a home budget: 4 steps to help you know where your money is going

A home budget helps you keep your spending in check by tracking all sources of income and all expenses. It also makes it easier to meet financial goals, as you’ll have a clear-cut path for your funds when they hit your bank account. Most importantly, you’ll avoid spending more than you earn, which could put you deep in debt. 

What is a household budget?

A household budget is a written plan detailing how income is used over a set period. Most cover a one-month period and help households manage all sources of income and outgoing expenses more effectively. Budgets can also be used to implement savings goals and other financial milestones you want to achieve.

How to make a home budget

Whether you’re navigating life with your significant other, splitting costs with roommates or focusing on your personal financial goals, budgeting is key to understanding where your money is going.

Here’s how to create and manage a home budget in four simple steps.

1. Choose a strategy for allocating your income

The point of establishing a budget is to organize how your money is being spent. As such, picture how you’d ideally like to distribute your income, so that you’re covering necessary expenses and building savings, while having a chunk of discretionary income left over for other spending.

There are a number of ways to create a budget that works for your individual needs. Some popular budgeting methods that can help get you started include:

• 50/30/20 budgeting rule: With this method, you would allocate your household income into three sections: 50 percent to needs, 30 percent to wants and 20 percent to savings. This strategy is an easy framework to follow, but it may not work for people with low or high incomes, or people who live in areas with high-cost housing.
• Zero-based budget: With this method, the goal is to allocate every dollar of your household income so that your income minus expenditures equals zero at the end of the month. That way, if you have $100 left over, you have to allocate it to something, such as paying down debt.
• Envelope budget: With this method, you create a standard budget. Once you’ve identified your expenditures, you take out cash for each expense and put the money into separate envelopes. Because most expenses aren’t paid with cash, a variation of the envelope budget is simply to keep a running electronic tally of expenses within each envelope, or using an app-based version with virtual budget categories, like Goodbudget.

The budget you choose ultimately depends on your financial priorities and personal preferences. Take time to find out which approach works best for you, and make tweaks to each to fit them to your specific household needs. You can also use Bankrate’s Home Budget Calculator to get a headstart on creating a budget.

2. Track your household expenses

Gather information from everyone in your household to account for all of your living costs. You can utilize online banking tools and personal finance apps to track and categorize expenses automatically.

Apart from keeping track of your fixed expenses, like rent and utilities, give yourself room in your home budget for unique, non-recurring circumstances that you haven’t budgeted for. Items such as expensive car fixes, home repairs and tutoring services for your children may require a higher bump on your list of financial priorities. Consider sitting down with members in your household to discuss family expenditures.

And don’t forget to include the funds you’re saving for financial goals. For example, if you want to save $1,200 in a year, you’ll need to include an expense line item of $100 in your monthly budget.

3. Write everything down

Documenting your home budget in a spreadsheet or a budgeting app will allow you to visualize your spending and savings. Find a template online that can tailor your financial needs into a practical application. If you want to make your own, using Google Sheets, an Excel document or even putting pen to paper in a notebook will work.

In the budget document or app, you’ll want to include details such as the expense category, line item and amount. Then, you can spot potential areas of overspending or opportunities for savings.

4. Monitor and adjust your spending

Regularly monitor your income and spending, and revisit your budgeting strategy to make sure it’s helping you meet your goals. Unexpected events and expenses are a part of life, so give yourself the flexibility to re-evaluate and adjust your budget as circumstances evolve.

Analyze your spending patterns, identify any deviations from your budget and make necessary adjustments to meet your goals.

Tips for successful home budgeting

• Set realistic goals: It’s important to have both short- and long-term goals that align with your budget. Whether it’s saving for a vacation, paying off debt or building a retirement fund, clearly define your objectives and track your progress toward meeting them.
• Make saving non-negotiable: Even if you’re not saving 20 percent of your income each month, try to consistently set aside a portion of your income for emergency funds, retirement accounts or other savings funds. One way to help you stay on track to save is by setting up automated savings transfers.
• Be conscious of impulse spending: Impulsive purchases — those made on a whim or spending to cope with emotions — can derail your budget and lead to regret once the initial excitement of the buy fades. Try implementing a “cooling-off” period before making non-significant purchases, so you give yourself time to contemplate whether you truly want to buy it or not.
• Look for small ways to reduce spending: Examine your utilities, insurance subscriptions and discretionary spending to see where you might be overspending. Consider negotiating better rates, switching providers or limiting your energy usage at home.
• Involve the entire household: If you share finances with family members or roommates, include them in the budgeting process. You can collaborate on financial goals, finding room for splitting expenses and encouraging one another to save more.
• Balancing wants vs. needs: It’s never fun to have more month than money. If you can relate, you likely need to take a closer look at your needs and wants. You have to pay your rent and phone bill – those are considered needs and they are non-negotiable. But see where you can make reductions in spending on “wants” like dining out or shopping – even if it’s only for a short time until you can increase your income or make budget cuts elsewhere.

Bottom line

Creating and managing a home budget is an invaluable tool for organizing your finances and improving your financial security. By following the steps outlined above, you can ensure bills are paid on time, reduce stress and work toward achieving financial goals. Remember that budgeting is an ongoing process that requires regular monitoring and adjustments.

—Freelance writer Allison Martin contributed to updating this article. Amanda Push wrote a previous version of this story.