Your household budget is the lynchpin of financial responsibility.
Having one in place can help you spend less than you earn and reshape your financial habits and priorities.
But how you craft your budget matters.
Too often, savings are put on the back burner – a blank space in your budget that’s only filled after all the spending categories are accounted for.
As people deliberate over how much take-out pizza they let themselves order and the precise dollar amount to splurge on shampoo every month, they lose sight of the bigger picture – a budget is supposed to guide you into saving more.
Too often, a budget ends up micromanaging your spending, which can lead to frugality fatigue, causing people to abandon their carefully crafted spending plan altogether.
What you want is a budget that puts savings front and center – a budget that you can stick to because it produces tangible results.
Now I will walk you through the steps of building a savings-focused budget.
Of course, you’re welcome to download my budget template, and follow along.
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Step 1: Calculate Your Household Income
Before diving into the nitty-gritty of expense planning, you first need to know how much money you’re bringing in every month.
If, like the vast majority of folks, your primary source of income is your job, this step could be as easy as taking a quick look at your pay stubs.
As you eventually develop additional income streams, don’t forget to include them all in the top section of your budget:
- Salaries
- Dividends
- Interest
- Rental income (or earnings from Airbnb)
- Royalties
- Side hustles
- Business income
- Other
Step 2: List Your Necessary Expenses
Next, detail your essential spending item by item.
These are non-negotiable bills and obligations that must be covered no matter what else happens.
The most common essential expenses are:
- Rent or mortgage payments
- Groceries
- Utilities
- Debt payments
- Gas
- Daycare
- Medical expenses
- Property taxes
- Insurances
Because essential expenses are usually stable and predictable, if you already have a budget, you can use it as a blueprint to create this section of the budget. If not, you can simply gather your household bills, dig up old receipts and look at your online banking transaction records to get the most accurate expense numbers.
Step 3: Set a Savings Goal
Armed with the information above, you can now work backward, and decide how much of your remaining income (income that’s left after all essential expenses are taken care of) should be allocated to savings.
Let’s say your monthly household income is $4,000, and your essential spending takes up $2,500 of it. How much of the remaining $1,500 would you like to save?
Perhaps you’re content with a modest savings target (“I want to save $500 out of that $1,500″ or “I want to save 15% of my remaining income”) to start, and that’s cool. You can always tweak it later and work your way up as you get accustomed to savings-centric budgeting.
It’s good to set a savings goal, but it’s better to set an ambitious one.
Theoretically, you could save 100% of the remaining income and not worry about ever getting into debt for basic living expenses. Of course, I wouldn’t recommend that. Depriving yourself of leisure for an extended period is simply not sustainable.
A savings goal of 40% to 60% would be more feasible.
Once you get the hang of it, you will start treating savings as just another bill – one that must be paid month after month. Because saving money really is as essential as putting gas in the car and keeping the lights on.
Step 4: Balance the Budget
Now that you’ve set aside portions of your income for basic living expenses and savings, it’s time to have some fun and tackle everybody’s favorable section of the budget: discretionary spending.
Discretionary spending refers to non-essential expenses, such as leather purses, golf vacations, and Twitch subscriptions (though I’m sure some would argue that they’re mighty important).
Here are some of the most common discretionary expense categories:
- Entertainment
- Take-out and dining out
- Clothing
- Luxury items
- Charitable donations
- Vacations
- Hobbies
After subtracting savings and essential expenses from the amount you earn, you’re left with a fixed amount of money that you can spend on anything your heart desires.
Let’s say your monthly income is $5,500, your essential expenses and savings take up $5,000, then that leaves you with only $500 for discretionary spending a month.
Whatever you do, please don’t go back and adjust your savings down to boost your discretionary spending. Treat your total discretionary spending as a hard limit that you’ve set for yourself.
Yes, this means that you might have to figure out a way to make that number work, whether it’s prioritizing some leisure activities over others, dining out less frequently, picking up more affordable hobbies, or self-imposing a shopping ban.
Cutting back on things and activities you usually enjoy is never easy, but your sacrifice will not be in vain. The steady growth of your savings account is worth it.
Onward and Forward
Having a budget is great, but not focusing on savings could eventually lead you right back to where you started.
By turning the traditional household budget on its head and prioritizing putting money aside, you are adopting a savings-centered approach – one that will help you plot the path to a more financially stable future.
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