Creating a Home Budget

Remove the stress of managing your personal cash flow by creating a robust home budget. It doesn’t have to be an onerous task, and the investment in time upfront will avoid any nasty surprises being sprung throughout the year. This article describes the seven steps you need to take to achieve this, and the order in which to take them.

There is no dark art to setting up and managing a home budget. You don't need prior experience in financial management or a mathematics degree-nor do you need to spend money on a fancy software package. You just need an that's going out, and a little bit of time to sketch it out. You can create a simple spreadsheet to capture all the numbers, or just stick to good old pen and paper if you prefer.

The key to creating a robust home budget is to follow a logical order. The seven steps below walk you through each task in sequence:
 

Forecast your income coming into the household. Break this down into the following two types:

• Fixed Income: Identify all your fixed income streams, such as a salary from employment. Make sure you capture the net figure, after-tax and any other deductions, such as a pension.

• Variable Income: If you have income that varies from month to month, such as from advertising on a website or sales through self-employment, you should estimate what this income will be from one month to the next. Don't forget to consider external factors that impact this, such as seasonal peaks or troughs. If you are including earnings from self-employment, don't forget to consider tax. Either adjust your estimate to reflect anticipated tax deductions or include an expenditure line against the appropriate month (see step two below) to reflect the tax liability.

Crucially, be realistic with your income forecast. Resist the temptation to over-estimate your variable income. Better to hear on the side of caution at the outset, rather than find yourself short after failing to realize your heady expectations.

Forecast your expenditure
You need to map out all anticipated expenditures across each month of the year. This is essential to ensure that you don't find yourself with a bill you cannot pay later in the year because you failed to foresee it. Break down expenditures into the following four categories and map them against each month of the year:

• Regular fixed expenditures: These are your regular outgoings that remain static from month to months, such as mortgage repayments or insurance premiums. They are easy to predict and easy to identify from your bank statements.

• Irregular fixed expenditures: These are fixed outgoings that don't occur every month. For example, an annual accreditation fee for membership of a professional body. This only occurs once a year, but you know when it's coming and how much it's going to cost.

• Regular variable expenditures: These are regular outgoings where the amount of expenditure varies, such as a mobile month to month, you may want to apply a broad-brush approach and estimate a monthly cost that is equal to the worst-case scenario. For example, if your mobile phone bill varies between 30-40 dollars per month, then forecast for 40 dollars per month. However, if there is wide variance, such as between heating bills for summer and winter months, you will need to look at previous years and reflect a higher expectation of expense in the winter months.

• Irregular variable expenditures: These are the wild cards that can mess with your budget. For example, auto-related expenditures, such as unexpected repairs. You can be sure these costs will come, but you can't be sure what they will relate to or how high they will be. However, these expenditures are also your opportunities to get back on a budget if you have unexpected costs during a month. For example, an allowance for indulgence in random trips to Starbucks. You must budget for these things if they are a reality, even though you may decide to forego them during a difficult month to get yourself back in the black.

Looking at the forecast is sensible. How much extra you add to your forecast depends on how much comfort you need, and how much flexibility you have with your income.

Validate Your Forecast
After mapping out your forecast monthly income and expenditure, you need to validate that your total forecast expenditure for the year does not exceed your total forecast annual income. If it does, you need to revisit your expenditure to find ways to cut it. While doing this, you may find ways to multiply your sources of income for it to increase and therefore comply with expenditure in the long run.