What is a household budget and why have one?

Why should you manage a household budget?

Every company has an accountant (assuming they aren't on vacation) who keeps track of both business revenue and expenses. Sometimes, there is also a financial advisor who suggests the best solutions to the problems the business owner is currently facing.

They both want to achieve the same thing you do: make sound decisions and generate cash surpluses. This is how well-managed companies operate. You can apply these same principles to your personal life!

Unless you are a multimillionaire, hiring an accountant to monitor your family budget seems like unnecessary drama. You are perfectly capable of doing it yourself.

What will help you control your household budget?

• Earnings – The foundation for calculating what you can afford or what you might need to cut back on. Beyond your base salary, this includes overtime, performance bonuses, quarterly incentives, selling old items on auction sites, side hustles, tax refunds, or any other source of income.
• Fixed expenses – The "givens," such as rent, children's extracurricular activities, internet, phone, and TV bills, etc. This is the easiest part of the budget because you pay the same amounts every month. They help you determine at least an approximate minimum cost of living. Plus, you can quickly check if all your obligations have been met.
• Regular expenses – Similar to the previous group. These include things like groceries or fuel for your car. You incur these every month as well, but the amounts vary, and you can only estimate them.
• Irregular expenses – Costs that vary in amount each month and aren't necessarily essential for daily survival. Examples include dining out, movie tickets, books, etc.
• Cyclical expenses – Costs that occur sporadically but are predictable and usually happen in the same month each year: car insurance, vehicle inspections, property taxes, birthday gifts for your spouse, or heating bill adjustments. By tracking these costs, you won't just avoid forgetting them and be able to set aside the money in advance; you'll also be able to monitor how these costs change year over year.
• Savings – What you have left over and want to set aside for a specific goal. Maybe a vacation, a language course, or a new car? You will learn why being specific about your savings is important in future materials.

As you can see, a budget allows you to control many things happening in your wallet that you might not even be aware of. A common excuse for not keeping a budget is, "I already know all of this." I am convinced that if I asked you about a specific area, you wouldn't be able to answer me. There is nothing wrong with that.

First, because we are just starting, and you will soon discover potential cash leaks. Second, you want to get this data out of your head and into the most convenient tool possible. This data shouldn't overwhelm you, and we won't be pinching pennies, because that’s not what this is about.

What is a household budget?

Contrary to popular belief, tracking your expenses is not the same thing as a household budget. Household budget is a tool for monitoring your financial situation. It consists of planning your income and expenses, monitoring them on an ongoing basis, and, most importantly, analyzing the data and drawing conclusions. Only by bringing all these elements together can you make rational financial decisions.

Notice that I used the phrase "planning expenses." A household budget is a plan for the future, not a passive record of the past. What most people do is simply track their expenses, not maintain a household budget. This does nothing to increase your awareness of your financial situation. Of course, entering receipts into an app or spreadsheet is very important. That is the very activity that allows you to determine how much you are actually spending. However, just recording costs won't get you anywhere. You need the other pieces of the puzzle for that. We will take a closer look at each of them in the upcoming materials. A good household budget will allow you to achieve your financial goals faster and more effectively!

What should a household budget be like?

Since you are using this material on the MultiLife platform, you likely have access to it through your employer. There is a good chance that you spend part of your day staring at Excel spreadsheets, and the absolute last thing you want to do is sit down for another few hours to manage a budget.

You won't be doing that with me. I stick to a few rules that allow me to spend less than 15 minutes a month on my budget. You will learn the specifics in the next materials, but for a warm-up—a budget should be:

• Easy to use - Choose the tool that suits you best—a spreadsheet, a program, or an app. Download it, test it, delete it, and try another solution. Your first choice isn't always the best, and what others recommend might not be right for you. We all have different needs.
• Clear - Dozens of features might give you a sense of greater control, but they also clutter the program, which is especially distracting in mobile apps. Focus on simplicity, and you won't give up after a week.
• Flexible - This is more about you than the tool. A budget doesn't always balance, and that is completely normal. Don't give up just because your assumptions don't match reality. That is exactly the point! A budget is there to help you identify what differs from your expectations and react accordingly.

That is enough for today. I know full well that many people treat managing a household budget as a chore. You will see that it can be done differently, and I won't overwhelm you with unnecessary knowledge because this is not a complicated topic at all.

See you next time!