How to Make a Household Budget
1. Consider your monthly expenses
You’ve probably realized that your responsibilities as a homeowner aren’t the same as when you were a renter. That goes for your monthly bills, too, and there are a few you may not be familiar with.
Utilities: You’re probably used to paying for electricity, gas, and internet, but you may not have paid directly for water, sewer, or trash collection. These are often billed every other month. If you have an oil furnace, you’ll need to fill the tank now and then; plan ahead so the occasional expense doesn’t come as a shock to your budget.
Property taxes and homeowners insurance: Property tax is a tax you pay to state or local governments based on the value of your home. Homeowners insurance protects you financially from future damages to your home or in case any visitors are injured in your home. Most lenders include these charges in your monthly mortgage bill, but if yours doesn’t, you’ll need to handle them on your own.
Homeowners association (HOA) dues: If your home belongs to an HOA, you’ll need to pay dues that go toward maintenance and operating costs. These may be due quarterly rather than monthly, and often they are rolled into your mortgage payment.
2. Start building an emergency fund
After moving into your new home, it’s tempting to spend a lot of money on furniture and appliances. But before you get caught up shopping, make sure you have enough room in your household budget for unexpected expenses.
Why you need an emergency fund
When you own a home, it’s up to you to respond when things go wrong. A major appliance could stop working, the plumbing could spring a leak, or your air conditioning could call it quits. A storm could rip shingles off your roof or knock down trees. There are plenty of emergencies that can take a chunk out of your bank account, not to mention car repairs, medical bills, or income loss that can make it harder to keep up with your mortgage.
How much emergency fund do you need?
Most personal finance experts recommend you set aside three to six months worth of living expenses as an emergency fund, or about 1% to 3% of your home’s value.
That said, your emergency fund amount will depend on your situation. If you’re in a more secure, salaried job, three months may be enough. If your income varies or is less reliable, aim for six months. A new home with all new systems and appliances is less likely to need repairs early on, while older homes will likely cost you money sooner.
3. Think about home updates, remodeling, and other goals
Investing in regular maintenance will keep your home and its systems in good working order. Set aside money for to-dos that only come around every so often, such as clearing out gutters, cleaning carpets, and pressure-washing the deck. See a home maintenance checklist.
Making strategic home improvements can also pay off in the long run. Certain upgrades will not only make your home more attractive and pleasant to live in, but can increase its price when you sell it later. Examples include remodeling the kitchen or bathroom, replacing flooring, and removing popcorn ceilings. Get more home improvement tips.
These projects may not be as tempting as a new hot tub, but could be smarter goals for your household budget—at least for now. It all depends on your home and priorities.
4. Create your home budget
First, keep in mind that your household budget will change over time. Your income may grow or shrink; you may add a family member or pay off debt. Revisit your budget regularly to make adjustments, and consider using a spreadsheet so updates are easy.
The 50-30-20 rule
One popular approach to creating a budget is to use the 50-30-20 rule. This directs 50% of your income to expenses, 30% to “wants,” and 20% to savings or debt repayment. If your expenses typically add up to more than 50% of your total income, the “wants” category is the first place to reduce your spending. See how your spending compares to the 50-30-20 budget.
Finance experts advise that you try to maintain your savings at 20%. This allows you to build up an emergency fund fairly quickly, and then redirect savings to a retirement account as well as fund vacations and special gifts. If you can’t afford 20%, decide what’s possible for you—anything is better than nothing—and commit to it.
Step A: Start with your income
Pull together pay stubs or your W2 or W9 statements from your employer, or any deposit documentation that captures your income picture. Divide the yearly total by 12 to get a monthly total.
Step B: List all of your expenses
To be the most useful, this list should cover every dollar you spend. Include your recurring known expenses: mortgage, utilities, taxes, insurance, car payments, cable bill, cell phone bill. List quarterly payments like car insurance and trash collection, and divide them by four to get a monthly payment.
Then list all of your other monthly costs like groceries, dining out, gas, and entertainment. That includes minor cash expenses too, like the $20 you spend to buy coffee for the week. Also account for the money you should be putting in savings based on the 50-30-20 rule to arrive at a monthly total for expenses.
Step C: Subtract your expenses
Subtract your monthly expenses from your monthly income. You should arrive at zero, or pretty close. If you don’t, you missed listing an expense.
Armed with actual numbers, you can now make changes to advance your goals. Do you often dine out or order meals delivered? You’ll see in black and white how those daily and monthly expenses add up. If you’d prefer to spend your money elsewhere, you may decide to make more meals at home.
The money you save can go toward goals like an emergency fund, a kitchen remodel, debt reduction, vacation, or retirement.