Household Budgeting: Overview
What is a Household Budget? It’s simply a formalized written summary of your income and expenses and it’s a tool used for tracking how much money you make, how much money you spend, the value of your stuff, and how much money you owe because you bought that stuff.
In financial terms, budgeting is a process whereby you keep track of your income earned, the daily expenses you incur, the value of your assets, and the amount of your debts or liabilities.
Note: Budgets are the financial foundation for companies and governments and they should be the foundation for your family’s finances as well!
How to create a budget in two steps: it’s a necessity
Budgeting, when done properly, provides you with a realistic and accurate accounting of your money, that is, how much you have, where you spend or allocate it, and the net financial results of your purchases.
By constructing a budget you are creating a snapshot of your finances today (also known as your financial starting point). Before you can begin to plan achieving your financial goals for tomorrow you must identify where you are today.
InvestingForMe approaches budgeting with a focus on your expenses and your net worth. Income is important and is tracked within the budget, but for most Canadians we do not have much control or influence over our income. We do, however, have much greater control over our spending and our purchase decisions. InvestingForMe prefers to focus our energies on those things we can influence and change – budgeting.
When it comes to proper budgeting you will need to use a minimum of two financial tools:
The Household Budget
Formalizing a Household Budget is useful in identifying exactly where you spend your hard earned income. A budget can be used to control and restrict your spending habits and/or it can be used to make sure that you making wise and beneficial spending decisions. For example, are you spending too much for your cell phone, Internet, television services? Are you paying for medical or dental insurance coverage you already receive under your spouse’s plan? Are you paying for a monthly fitness membership, but never go?
Your Net Worth Statement
Your Net Worth Statement helps you to track your progress in accumulating financial wealth. It tracks the value of your assets and the amount of loans you remain obligated to repay. When the values of your loans are subtracted from the value of your assets, the resulting number is said to be your net worth. Your net worth can be increased by accumulating savings, increasing the market value of your assets, and by decreasing the amount of your outstanding debts.
Remember: While establishing an accurate budget and net worth does require an investment of your time, once you have an established budget, maintaining it is easy and extremely beneficial.
Note: InvestingForMe provides both a Household Budget and Net Worth Statement tool in our InvestingForMe Tools section. As you begin constructing your budget and net worth statement you can save both to My Folder. This provides the flexibility to work on both these summaries as time permits or as your financial circumstances change. Also, in the Budgeting Resources section, InvestingForMe provides important reference materials in the form of websites, books, and articles to assist with your budgeting efforts.