Creating a Household Budget

Image of jars full of coins labeled with expenses

For some people, budgeting is a bad word. It's something that tells you what you can't do anymore. For these people, the thought of setting up a budget means that their ability to enjoy life will be over. However, for those of us who have embraced budgeting, we know that this is entirely untrue. In fact, if properly implemented and maintained, a budget is something that can help you preserve your current lifestyle.

So, why are some people reluctant to use a budget? For some, it's the feeling that they will no longer have control over their money and it will inhibit their lifestyle. For others, it's because they don't see the need for a budget because they don't have "financial problems". But, for others, it's simply because they don't know how to do it properly. The manner in which you budget isn't quite as important as the fact that you're actually doing it. Whether you choose to budget online or on paper, there are several steps to creating a budget that works for you. Fundamentally, a budget is pretty simple, and perhaps the best way to get started is to use a budgeting worksheet. Now, let's get started!

Step 1: Estimate Your Monthly Take-Home Income

The very first step in creating a budget is to estimate your monthly take-home income, which is your net income, or the actual amount of your check after taxes and other deductions. This is the easy part, although it can get a bit tricky when considering overtime or fluctuating hours. We never recommend counting on overtime when determining your monthly income, although we realize that this can be a major source of income. Use your best judgment. If you're reasonably sure that overtime is constant and it won't be reduced in the near future, go ahead and count it. But if overtime is only given out "as needed", or if the amount of overtime you get fluctuates greatly, it's best to stick with your base pay. If you can establish a budget and pay your bills without the use of overtime, you'll be way ahead of the game. These funds can be used to establish a rainy day fund, or to save for larger purchases or retirement. More on this later.

If your income varies a lot from week to week, which is quite common for wait-staff positions, for example, then you'll need to look back for the past few months and determine your average monthly income from this job. Granted, this method isn't exact, but it should get you close.

There may be other sources of household income too, in addition to your wages. Be sure to include all sources, including income from your spouse, child support, social security, etc. Add up all sources to get your total monthly net income. Now you know what you have to work with and it's time to figure out your expenses.

Step 2: Estimate Your Monthly Expenses; Create a Journal

Estimating your expenses can be a bit tricky. You really have to keep an open mind and try to list everything that you spend money on. Let's face it, our lives are hectic and we can easily lose sight of all of the "little extras" that we purchase throughout the week/month/year. The best way to list your expenses as accurately as possible is to create a weekly journal or create a monthly journal. By taking the time to jot down everything you purchase, you'll quickly see where your money is going and you'll have a truly accurate snapshot of your total expenses. You'll know exactly how much money you spend every month on your living expenses, as well as your "comfort items." However, be prepared for some rude awakenings during your journalizing experience. Most people simply don't realize just how much money they spend on coffee, for example. However, after journalizing this expense, they see that they are spending $2 every day for a large coffee. At the end of the month, they now see that they've spent over $50 just for coffee that they could have easily made at home for about $7! Now you should be starting to see the value of journalizing. If you can save $50 just on one line item, image what you could save if you really took journalizing to heart.

Now it's time to take note of your general living expenses. These expenses include:


  • 1st mortgage
  • 2nd and other mortgages
  • Rent
  • Home or renter's insurance
  • Property taxes
  • Condo fees
  • Lawn care
  • Security system
  • Other home expenses


  • Electric
  • Gas/propane
  • Oil
  • Water/sewer
  • Garbage/trash removal
  • Home phone
  • Cell phone
  • Cable/satellite TV
  • Internet or bundled entertainment service
  • Other utility services


  • Auto loan or lease payment
  • Auto insurance
  • Gas
  • Maintenance
  • Public transportation/taxi services
  • Parking/tolls
  • Auto inspection
  • Registration fees
  • Excise tax
  • Other auto expenses


  • Groceries
  • Lunches/snacks at work
  • Restaurants/take-out
  • Clothing
  • Laundry/dry cleaning
  • Religious/charitable donations
  • Movies/concerts/sporting events
  • Video rentals/online movie services
  • Pet care
  • Hobbies/habits
  • Haircuts/Beauty
  • Birthdays/gifts
  • Vacations
  • Other living expenses

Child Care

  • Day care
  • Child support
  • Tuition expenses
  • Babysitter
  • Activities
  • Sports
  • Allowances
  • Other child care expenses

Medical and Insurance

  • Health insurance
  • Life insurance
  • Other insurance
  • Doctor bills
  • Dentist/dental insurance
  • Prescription medications
  • Other medical expenses


Although a lot of your household expenses will remain constant from month-to-month, such as your mortgage, car payment, and insurance premiums, some of these monthly expenses can and will fluctuate throughout the year. The best example of this would be the cost to heat your home. Obviously, we spend far less on heating expenses in June than we do in December. This is also usually true for electric expenses, especially if this is how you heat your home. Once again, the best way to get an accurate number of this line-item is to look at your past bills, which are usually available on the utility company's website. Granted, you'll never be able to estimate your heating expense with 100% accuracy, but you should be able to get it close.

Perhaps the biggest problem with estimating an expense like heating is the fact that you still have set a budget allocation for this unknown expense. Thankfully, many companies understand this and have instituted monthly billing programs that estimate your total annual usage and allow you to pay this estimated amount on a monthly basis. So, even if your gas bill is $40 per month in July, but jumps up to $300 in February, you'll still be able to budget, relatively accurately, for this expense.

Step 3: Put it all together

Add up all of your income sources and then add up all of your expenses. This will give you a good idea where you stand. Do you have a lot of extra money at the end of the month or is your budget really tight? For a vast majority of us, the latter is generally true, and if that's true for you too, then it's time to take a close look at your expenses. You'll want to determine which items on your budget are essential expenses, such as your rent/mortgage, condo fees, utility bills, insurance, car payments, and pay those first. Next, determine which of your expenses are "extras" or "comfort items". If your budget is too tight, you're going to need to make a choice. Using our example above, is it really necessary that you buy a large coffee every day, or can you sacrifice the extra few minutes every morning and just make it yourself. This is true for nearly every item on your budget that is considered "non-essential". Figure out what's most important to you and figure out a way to make your budget work for you.

Step 4: Save, save, save!

he most important thing, aside from bills, that you should factor into your budget is the portion of your salary that you will be putting into savings. If you're not saving a portion of your salary already and you think you might have a difficult time at first, we suggest starting out putting a small portion of your salary into a savings account and get used to living on what remains. Start with 1% and slowly increase the amount you save until you have at least 10% of your paychecks going into a savings account for short-term savings.

Why is it so important to save? Well, for one thing, you're saving for three reasons. It is important to have funds for short-term savings (the 10% we suggested just a moment ago), long-term savings, and also for retirement. Short-term savings takes care of things such as emergencies, unexpected household repairs, and spontaneous events that may come up. Long-term savings covers things such as vacations, tuition for your children, and future home purchases. Retirement planning is the most important portion of your savings. It is your nest egg for after you stop working and determines how long you will be able to live comfortably.

What percentage of your yearly income should you be saving for retirement? Most people do not know the answer to this, which is one reason many of us do not save the proper amount. Realistically, you should expect your living expenses to be about 70% of what you are currently paying. Sure, you may not have a mortgage in your golden years, but you may have a lot more medical expenses. The typical age for retirement is 65 years of age. The typical life expectancy for Americans today is between 75 and 80 years of age. That leaves a minimum of 10 years of your life, during which you're not working, that you need to have an adequate amount of money to support yourself and your spouse. We always recommend speaking with a retirement planner to determine how much you should be saving for retirement. Remember, it's never too late to start planning for retirement. Granted, the later you start, the harder you'll have to work, but it's vital that you speak to a professional, develop a plan, and get to it!

For more advice on establishing a household budget that works, contact one of our nationally-certified credit counselors for a Free Debt Evaluation. Call (800) 235-1407 or click here to schedule an appointment with a credit counselor.