How to Balance a Home Budget

Balancing your budget begins with organizing.

Balancing a home budget begins with organizing. For many, budget problems are the direct byproduct of failing to track income and expenses. Likewise, many people hit financial troubles when sudden and unexpected expenses appear, but there are not sufficient funds in savings. Budgeting, therefore, is a long-term process that reaches far beyond a month to month process.

Assess Your Income

As basic as it sounds, a balanced home budget requires one to know how much money is coming into the household. This is most easily done on a monthly basis, but known bonuses or withholdings should be considered, even if they are months away. The income figure should be the "net" paycheck for the month and should account for deductions related to taxes, 401k's, insurance, etc.

Similarly, this process should include an assessment of potential increases in income. For example, a second job or a home business can increase income significantly.

Establish a Safety Net

In a "typical" month, money should be earmarked for saving. This is separate from the saving for retirement and instead is intended to serve as a "rainy day" fund. A budget can quickly fall out of balance with large and unexpected expenses. For example, major car repairs can cause severe financial problems if the "rainy day" fund is too small or, worse, does not exist.

The rainy day fund should remain in a very low risk investment, such as a savings account, where it can be quickly accessed.

Identify Essential Expenses

Certain expenses are inevitable. Housing, food, clothing and other essentials of life must exist. These inevitable expenses should be subtracted from the income. Included in this amount are bills that are due, including payments on school loans, credit cards, etc. The remaining amount is a major step closer in the process of identifying discretionary funds.

The process of identifying essential expenses can be challenging because it requires an honest assessment of what items are essential and what items are luxuries. For example, while shoes are essential, designer shoes that cost hundreds of dollars are not.

Estimate discretionary income

After identifying essential expenses and deducting them from the total monthly income and after deducting contributions to a rainy day fund, one has an estimate of discretionary funds. These funds serve at least two purposes -- they are the source of luxuries and treats and they can improve future budgets.

If the estimated discretionary income figure is negative, then your income is too low to meet your essential needs and to contribute to a rainy day fund. This requires an additional review of the items that you have deemed essential to assure that nothing can be removed. Likewise, it requires an evaluation of additional opportunities to increase income.

If the amount is positive, then there is money available for luxuries. Life is more enjoyable if it includes items beyond the essentials for survival. This might include items related to a hobby or anything else that might be fun.

However, instead of spending on luxuries, it is often wise to invest discretionary funds. For example, this money might be invested in the stock market and the dividends from a stock could help increase your income for years to come. Similarly, it could be used to pay down debt, which will reduce essential expenses in the future and therefore increase discretionary funds.

Pay Off High Interest Debt

Many people regularly pay high interest rates on credit card debt and this can severely affect a home budget. Credit card interest rates often are over 10 percent and exceed the returns on almost all investments. Consequently, high priority should be placed on eliminating credit card debt. In so doing, one can reduce recurring expenses significantly and make a balanced budget far easier to achieve.

References

• Household Budget Basics
• Budgeting 101: How to Balance Your Budget