Funny enough, most people I know don’t have a household budget. Oh, they might have a broad idea of how much they have, how much their monthly bills run, and other “big ticket” expenses, but in terms of an actual household budget, most haven’t a clue.
In my experience, people who have comprehensive household budgets fall into one of three categories: those in financial trouble, those who are exceedingly well-organized, and those whose New Year’s resolution have not yet lapsed.
That said, having a budget is a really, really good idea. Even if you are financially comfortable, it will help you save, prioritize your spending, and get a realistic picture of your budget priorities. However, it is not as easy as you might think.
As part of my consumer debt practice, I frequently ask people to outline a budget of their actual expenses. A few things I have noticed:
-Everyone underestimates food. The reason is simple: I ask you what your monthly food expense is, and more often than not you will figure out how often you go the grocery, and how much you typically spend on each trip. This is only part of the equation. Most families spend a significant amount of money eating out, and this is often under-reported. A realistic budget should include between $250-$300 per person, per month: that only works out to $3.33 per meal.
-It’s okay to recreate. “Recreational expenses” are a category every budget should include, and the number should be realistic. There is nothing wrong with going to the movies once in a while, or seeing a concert. “All work and no play…” doesn’t end well.
-Some items can’t be measured monthly, such as car repairs, home upkeep, dental bills, annual dues, and other expenses that do not recur on a set schedule. A client once told me that his budget was just fine, until he blew three tires in the same month; there is no way to precisely budget for that type of expense. Rather, you should figure out how much these bills typically run per year, and then divide by twelve; call this amount your “contingency fund,” and write it into your budget. If the money isn’t used in a particular month, set it aside.
–Follow the money. No guess or estimate can ever replace the cold, hard facts. If you rely on debit cards or credit cards for most transactions, it makes this part easy. If not, either start, or keep a small pad of paper to record all of your purchases (how much, what for). The only way to accurately figure out how much you spend is to look at the real numbers coming out of your account.
-Start with a real budget, then work on the target budget. Too many people conflate the two. You may see from the “follow the money” step that you are spending $350 per month on recreation, and you may think that is too much. Resist the temptation to reduce it in your first budget document; first get an accurate budget, then work on changing it to meet your goals. That way, you can see where you started, and what progress you make over time.
-Finally, take a look at your taxes. Getting a big refund each year is almost as bad as owing; you are letting the government hold onto your money without paying interest. If need be, adjust your withholdings; you want to aim for a “break even” result at tax time. Accountants are very useful in figuring out how to accomplish this.
No doubt about it, budgeting is a chore. However, it is among the most important things you can do to ensure your financial success. Household budgets give your spending some structure, and if you keep them up-to-date, they give you a good roadmap of your spending priorities, and areas you can improve. I can’t recommend them highly enough.