Creating a Home Budget Step by Step


The other day I received an email from a guy that was looking for some help with his budget. What he really wanted was to run his family like a business.

While I think it’s a great idea to have the mindset that your family does operate with a bottom-line (that can’t or shouldn’t be masked by credit cards and borrowing beyond your means), you also need to remember that creating a home budget needs to be simple – and stay simple.

This guy wanted to know if the personal budget that I sell would allow him to do accruals. Heavens no! An accrual is basically where you might pay for an expense (such as car insurance) every six months, let’s say it’s $300. But you know that the expense really applies to the next six months. So you would spread that $300 over the six months – recognizing the expense on a month-by-month basis.

Sound confusing? It’s really not too bad. Businesses do it all the time because it gives a more realistic picture to their net income. (Imagine if a company had a big expense relating to the prior year that happened just after the new fiscal year started. It would understate that prior year’s expenses.

As a family, if your home is being foreclosed on, does the lender care that your net income looks good if you don’t have any cash to make the mortgage payment? Of course not. Families need to operate on a cash basis. Cash is, really, all that matters in the end (financially speaking of course).

Your First Step in Creating a Home Budget

Write down everything you spend for one month. This will give you a realistic idea of how much you will need to be budgeting into different categories. It’s crucial that you write down every penny you spend too. I’ve talked a lot about the power of writing things down when you first begin the process of creating a home budget.

Some people get after me on this and say they want to begin budgeting right now. Well, you are. Recording your expenses is at least half of your budget. The other half is planning what those expenses will be.

Actual Creating Begins Here

Once you’ve written down your expenses for one month, you’ll have a pretty good idea of where you spend money. So, write down every single fixed expense you have (these don’t have to be monthly). A fixed expense would be rent, car insurance, subscriptions, property taxes, internet, phone etc. Break those all down so they are monthly fixed expenses. So if you paid your car insurance premium every six months, you’d divide the premium by six to get your monthly car insurance expense (this is kind of like the accruals we talked about above, you’re just doing this to stock up cash, not recognizing the expense over the period in which it was used…).

Now that you have your fixed expenses, brainstorm all of your variable expenses. These might be electricity, gasoline, groceries, toiletries, gifts, entertainment, restaurant, etc.

Add both your monthly fixed and variable expenses together. That’s where your money is going. You’ve used what you’ve written down to help you be realistic about what these expenses really are.

Allocating the Budget

Now, if you have a spouse, sit down with them. If you don’t, sit down with yourself. Turn off the TV, radio, etc. This is time to focus. Decide on paper how much you want to spend this month in each spending category. Some categories will be easy (Rent), others will be tough (groceries). Take a look at what you wrote down and be realistic.

When you first create a home budget you’re kind of stepping into the darkness a little bit. That’s okay. Just don’t expect to be able to predict every expense the first, second, third, or even fourth month. If you’re abiding by Rule #4 of YNAB then you just roll with the punches when it comes to accidentally overspending. Resolve to do a little bit better each month.

Sticking with Your Home Budget

Stick with your budget. Don’t give up. Don’t throw in the towel. The budget is the most powerful tool you have to manage your money and make it do what you want it to do, instead of the other way around. Continue recording every purchase you make. Your spending will drop from that alone. Work together as a team if you’re married. Encourage each other to stay on the budget. Do not be domineering or coercive when creating your home budget together. Be honest and openly communicate your needs and wants. Be accommodating and sympathize with your spouse. Do not give up! I promise you after three months of active budgeting (1-2 hours per month) you will (seem to) have more money. Each dollar will work harder and longer. And you will finally gain some financial ground.