Designing the perfect household budget

ambareen Musa

Viewpoint

“Use a budget” — That’s what every personal finance guru, money blog and financial magazine seems to tell you. But how do you create a budget that’s just right for your household, your family’s needs and your way of life, without compromising on the end goal — to save money?

Here are the seven steps you should follow to build a monthly budget that’s ideal for your household.

decide how you will document your budget

Whether you opt for a pen and paper budget, an excel spreadsheet one or an e-budget on a budgeting app, pick a style you’re most comfortable with.

You can take a print out of a budgeting format of your choice or pen down one based on your specific requirements. Alternatively you can use a budget template to use in an excel spreadsheet. If you’re using a budgeting app, they usually offer customisable budgets and the app does most of the work for you.

start with your income

You most likely have a single source of income so list that first. In case you’ve taken up some freelance or part-time work on the side, add that to the total income. If you have an uncertain income or one that varies every month, be conservative and enter the amount that seems realistic and not too optimistic.

Categorise and list your expenses

Since debt repayment should be high on your list of priorities, start with that. List all your loan installments and credit card dues separately. Once you’ve allocated a portion of your income to these repayments, then move on to the other expenses.

Then list the ‘needs’ that include fixed and recurring expenses like house rent, utilities, kids’ school fees and groceries. Next list the ‘wants’ under discretionary spending such as personal expenses (grooming, entertainment, dining out and so on…)

don’t leave out your retirement savings and emergency fund

Most budgeting first-timers tend to only look at their income and expenses. It’s equally important that you allocate a portion of your income towards retirement savings and long-term investments.

You must also not forget to set aside a small portion of your salary towards building an emergency fund that should ideally be worth three to six months worth of expenses and must be replenished if used in case of an emergency.

Calculate expected spending in each category

You would already have a clear idea of what amount you need to allocate towards the unavoidable recurring expenses. But when it comes to discretionary spending, you have to keep it in check by allocating a fixed amount towards such expenses. For example, you can allocate Dh500 every month towards eating out, Dh 500 on personal shopping and so on. To meet the end goal of saving more money, make sure you don’t exceed your planned spending.

Compare planned spending vis-a-vis actual spending

At the end of the month you must compare your estimated spending with your actual spending. Add up all your expenditures every month and compare that amount to the total planned spending. Also compare this to the amount you spent in the last few months to get a good idea of how you’re doing in terms of managing your expenses.

It’s just as important to compare planned and actual spending in all the individual expense categories, especially in discretionary expense categories. So you’ll know exactly what you’ve overspent on and how to curb that next time.

Make adjustments to boost your savings

Don’t forget to look at the bigger picture. If you see that rent is eating into most of your salary, consider moving to a cheaper accommodation. Also look into other ways you can decrease your expenses — like cutting underutilised monthly subscriptions like your TV subscription, or downgrading your mobile package, to cut down on fixed recurring expenses.

You will also have to adjust your allocations if you get a pay raise. It’s best to increase your allocation the most towards primary goals like paying off debt and setting aside more towards long-term investments.