How to Set Up a Household Budget

Many people start each New Year wondering how to set up a budget. If budgeting is not something you've done in the past, it can be hard to decide where to start. When you get down to it, you may be surprised to learn you've been living beyond your budget for years. It is important to set up a good budget to stop overspending now and prepare yourself for a secure financial future. Regardless of your income, a good budget can keep you financially secure.

Start with Debt

The first thing to factor into a budget is your monthly debts. This includes mortgages, car payments, student loans, credit card debts and any other obligations. Your total debts should not exceed 50 percent of your monthly income; if you do not have a mortgage, your debts should be under 30 percent of your income. If you find your debts amount to more than this, it is time to consider whether you can afford the loans you have. You may opt to pay off and close your credit cards, consolidate loans to pay them down faster, or even trade in your car for a less expensive vehicle. Many people make the mistake of thinking they cannot control how much debt they have. Take positive steps to reduce your debt; it is within your control.

Consider Fixed Expenses

Once you know how much to budget for your debts, the next step is to factor in fixed expenses. This includes utilities, rent if applicable, grocery bills and any other costs you know you must pay each month. Again, be proactive with this step. If you realize your fixed expenses and debt combine to exceed your monthly income, ask yourself where you can cut back. Consider taking a smaller cell phone package, reducing your cable bill or shopping for less expensive groceries. All told, your debt and fixed expenses should be around 50 to 60 percent of your monthly income.

Budget for Savings

Before you spend a single penny on luxury items, save a penny first. Aim to save at least 10 percent of every paycheck. This savings does not have to mean a cash savings account. You can deposit the money in a retirement account, a college savings account or a mutual fund, for example. However, aim to keep about three months' salary accessible should you ever need it. If you lose your job and cannot find a new one right away, you will be thankful for this emergency fund.

Add in Luxury Expenses

Only after you have paid your debts, met your basic obligations and saved for the future can you safely spend money on non-essential items. Perhaps you have found your budget is maxed out before this step. In that case, know you will have to wait to spend money on items like movies and clothing until you have paid off some of your debt. If you do have extra cash in your budget at this point, you can budget for each luxury or simply use the money for "fun." In this case, decide how much cash you have each month to use as you please, and do not exceed this amount.

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