Personal Finance
Lesson 3
5 min

How can you set up your household budget?

Setting up a budget for your personal finances is essential for managing your money, your financial well-being and achieving your financial goals. 

  • A household budget or personal budget is essentially a table listing your income against your expenses

  • A budget helps you to monitor your personal cash flow and to track how and where you spend your money

  • Budgeting is an essential task in any long-term money management strategy

  • Setting up a household budget is easier than you think

In this lesson, you are going to learn about how to draw up and to plan a household budget for your personal needs.

Even if you have never heard of a household budget or even a budget before, money management plans are used much more commonly than you may think. For instance, did you know that governments of nations set up national budgets structuring their spending? Just like companies that need to plan to manage their financial performance, it is important to take some time to draw up a personal budget for yourself and your household. This is a convenient and easy way of monitoring where you spend your money, to see where your income goes and which expenses you have. By doing so you will also be able to figure out how much money you can potentially save and invest.

Why should I be planning the finances in my household using a budget?

Like you learned in lesson 1 of the Personal Finance section of the Bitpanda Academy, finances are one of the major causes of stress for many adults - creating a household budget and sticking to this plan may ease a lot of the anxiety that money may be causing you. You only need a few things to start setting up and planning a budget for your individual household. 

Sit down and take the time to draw up a personal budget for yourself and your household. This is a great way of monitoring where you spend your money.

Make your income and expenses lists

The best way to get started is to sit down and to give yourself some time to think about all the ways you are generating income and all the things that cost you money - these are your expenses, or in other words, your assets being used up as liabilities. Make two columns and write two lists. Or just simply copy the lists below. There are also lots of free spreadsheets available online which you can adjust to your budget needs. As there is no right and wrong in setting up such a list, feel free to adapt it to your own needs.

 
 
 
 

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Some examples of income - money flowing in - are: 

  • Salaries and wages you get regularly and reliably from working 

  • Bonuses you receive at work

  • Income from side businesses or additional jobs

  • Income from your investments (such as dividends from shares)

  • Passive income (such as royalties from books that you’ve written)

  • Royalties you receive from others using your intellectual property (such as music you’ve written)

  • Income from renting out any real estate that you are the owner of

  • Social security payments and transfers of any kind you receive from governmental authorities such as family allowances and pensions

  • Money gifted to you (ie. from relatives)

  • Any other type of regular income

Some examples of expenses - money flowing out - are: 

  • Payments for rent and utilities/mortgage on your house

  • Repayment rates for loans and debts of any kind (such as bank account overdraft or credit card bills)

  • Utility bills (electricity, water, heating, etc.)

  • Internet/phone/cable

  • Tuition for school, university, etc.

  • Groceries

  • Medical costs 

  • Clothing

  • Insurance payments

  • Entertainment and dining out

  • Gym membership

  • Travel

  • Home improvements

  • Personal grooming (cosmetics, vitamin supplements, etc.)

  • Anything else that you spend money on

Income and expenses

After you have made your lists, you are going to need your bank statements and credit card statements. Looking at one average month (or more if you want) of spending, use the amounts you typically spend as reference values. Review all transactions - incoming and outgoing - in these statements. Don’t forget to include expenses that you do not have every month but maybe in other intervals. Look at the amounts you spend every month on each item and write them down for each item. Finally add up your income and add up your expenses. 

Calculating your net income

Now you take the sum of your income and subtract the sum of your expenses that you have added up and write down the amount, regardless of whether it is positive or negative. The figure will hopefully be positive, meaning that you are not spending your entire income, or more than your actual income. 

Setting up a household budget and making sure you stick to this budget may ease a lot of the anxiety that managing your money may be causing you.

Reviewing your spending habits

Now it is time to review your spending habits in close detail. Are you possibly spending more than the money that is your income? If your expenses amount to more than you actually have incoming, this is known as going “over budget”. Carefully look at all the details in your spending list to figure out where you are spending too much money to find out where you could spend less. Which habits could you change in your daily life to lower your expenses and to spend less? Adjusting your spending habits as quickly as possible will save you a lot of trouble later on. You should identify expenses that are not necessary or where you could switch to eg. a cheaper option. It obviously depends on your personal situation, but earning more than you spend – even if it’s just a small amount – is crucial.

Investing your surplus income

If the review of your spending habits is positive and you have income left at the end of the month, congratulations! You can now start to plan how to best invest your surplus money to generate additional income. In our next article, you will find out more about how to start budgeting for investing

FURTHER READING 

BOOKS

  • Holmquist, Jenny - Budgeting: How to Make a Budget and Manage Your Money and Personal Finances Like a Pro

  • Lucas, Paul - Minimalist Budget: The Ultimate Guide To Save Money, Minimise Spending and Manage Finances

The basic monthly budget worksheets everyone should have

12 Free Budget Templates

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