It’s common knowledge among the financially literate that a home budget is integral to keeping your expenses in check. The beginning of a new year is the perfect time to look at your home budget and check how you’re doing. In fact, any time is a great time to budget – so why not start today?
If you’ve yet to create a personal home budget, here are some pointers on what areas to pay attention to.
1. Home or Household Expenses
Although financial planning experts disagree on the exact percentage, most of them agree that your housing costs, such as your mortgage/rent, home insurance, and taxes, should account for no more than a third of your total home budget.
However, it’s not enough to just lump all your housing costs into one portion of the budget. If you include utilities, cleaning and maintenance costs and materials, and more, you may consider breaking down your housing costs into the following:
- Rent or Mortgage: 60%
- Utilities: 20%
- Home furnishings and equipment: 10%
- Home maintenance (lawn services, housekeeping): 7%
- Home supplies: 3%
Utilities are unique because the amount you’re paying for them every month tends to change.
For this reason, Michael Levenson, CEO of Present Value and a former financial analyst for JP Morgan, suggests creating a spreadsheet that you can use to keep track of all your utility expenses.
When you record enough data over a sufficient period, you begin to see patterns, as well as spikes and falls in your budget, which you can then use to ascertain whether such expenditures are necessary.
For example, if you notice your electricity costs are unusually high, you can start asking yourself what you can do to regulate your energy usage and bring down your utility costs.
2. Transportation Costs
Your transportation costs should cover not just your car payments, but also car maintenance and gas. Cars are particularly tricky because different people value their cars differently. Some treat their cars as status symbols, some see them for purely practical purposes, and other simply don’t care about cars at all.
If you’re in the market for a car and want to live within your expenses, never spend more on a year’s payments than your monthly salary after taxes. For example, if you make $6000 per month, you can’t pay more than $500 for your car.
This can be a tough sell to most people, as most car owners in the United States spend around 17% of their income on transportation.
3. Food and Drink Costs
Most financial experts agree that the best practice when budgeting for food is to allocate no more than 15% of your monthly budget to it.
According to the Bureau of Labor Statistics, in the average household with parents and children, food accounted for 12.9% of their household budget in 2014.
To find out if you’re overspending on food, total your monthly food expenses and see if it exceeds the recommended budget allocation. If you’re spending 30% of your monthly budget on food, make the appropriate adjustments.
4. Emergency Expenses
Taking into account your housing costs, utilities, transportation, and food, you may be overwhelmed by just how many things you have to budget for. Don’t forget to set aside money for healthcare, debt, insurance/401K, clothing, and yes, even entertainment.
And even then, you still have to be mindful of emergency expenses. It’s easy to plan for, say, your utility bills because you know what’s going to happen if you miss a payment: no lights. However, you also need to think of issues that may require spending money on the fly.
Although you may not be able to plan for every emergency scenario, what you can do is budget your money so that you have something left over each month.
Aiming for 20% would be fantastic, but even having 5% left over from your monthly budget can go a long way to being financially secure.
It helps to know that you have a certain amount of money to spend each month for car repairs or for an unexpected household item.
If you didn’t have to spend on anything unexpected, continue setting aside money for your emergency fund until such a time that you’ll need it.
Budgeting isn’t easy. In fact, most people fail to budget their monthly incomes properly, commingling funds, and not setting aside a specific amount for each financial goal.
It also helps to create separate accounts for each portion of the household budget, that way you can identify which funds, be it your household, food, or vacation fund, has to be replenished after every use.