Creating a Household Budget

Whether you need to take control of your out-of-control spending or just want to see where all your hard-earned cash is going, it's important to learn to manage your budget. The first order of business, of course, is to create a budget.

Step One: Begin by determining what categories of expenses you have. If you own a home and have a mortgage, you probably won't need to break out insurance and taxes on the home if it is included in your payment. If you own a car, include separate categories for the insurance, maintenance, payments and fuel. If you have children, be sure to have independent categories for clothing, entertainment (toys/books/movies/trips) and education expenses.

Step Two: Next, ascertain the amounts you've been spending in each area for the past three months. If you use Quicken or other financial tools to assist in balancing your checkbook, that may come in handy during this step. You can simply run reports on your accounts to see what amounts you're spending in each category. If you didn't categorize your transactions as you entered them, you'll need to edit your transactions for the past three months before running your reports.

Don't forget that your checking account may not encompass all of your spending. Run reports on your credit card spending as well. If these accounts are not linked to your financial software, some credit card companies (such as Discover) offer reporting tools online.

If you do not use financial software already and don't want to start now, receipts and cancelled checks (or paid bills) are key. If you still have all of these items for the past three months, grab a calculator. Take the receipts and bills or checks for each month and make piles for each category of expenses. Add them up and take notes.

Step Three: Finally, it is time to lay out your anticipated expenses in a spreadsheet you can refer to all month long. In a few categories, it will be easy to determine what amount to enter because it is the same each month (mortgage payments, car notes, etc). With some expenses, it may be best to take an average of the three totals (groceries, clothing). With utilities, I recommend using the highest of the figures.

If you want to cut your current expenses, calculate that now. Warning: Be reasonable. Don't input a 10% lower fuel budget, if you can't carpool or otherwise drive less. If you've started cutting coupons and watching grocer sales papers, however, you might be completely right to cut your grocery budget by 5-10%.

Step Four: Use your budget! It is only good to you if you monitor your spending and compare it to your budgeted figures. Do this at least once a week. The more often you compare your spending-to-date to the total you have allowed yourself for the month, the less painful it will be.