Creating a budget can be a very difficult task. Although we as consumers know that we need to pay our bills, buy our necessities, and put some money away for savings, we don’t really know how to start.

I know from personal experience how hard creating a budget can be. In the beginning stages of my road to financial freedom, I would write all my expenses down on paper and notice that I would have very little or sometimes nothing left over to save. I tell my clients that seeing everything on paper is only the first of many reality checks while starting the journey of getting their finances in order.

I think most Advisors in the financial world will agree that using budgeting categories will help you organized things tremendously. Everyone will not have the same categories thus making every budget unique.

A category simply is nothing more than a grouping mechanism. Instead of listing each credit card bill separately on my budget, I will give all of my credit cards a category, for example I will list it once as “debt”. Some other popular budgeting categories are housing, savings, utilities, charity, food, transportation, childcare, miscellaneous and income to name a few.

There are many budgeting software programs out there. I suggest however, that in the beginning stages of creating a budget you continue to track things manually. This way you’re constantly viewing how your money is being spent and staying connected to the whole budgeting process.

Another very important task of a successful budget is keeping up with your expenses and all of your receipts. Now, I know this is difficult especially when buying what we think are small insignificant items but believe me it is very important, especially for married couples. If one spouse is spending $4.00 a day per month on a Cappuccino, that one purchase is costing your household $120.00 a month. To help solve this difficult task, keep a “receipt” box in a common area and commit to tossing all of them daily. When you sit down to work on your budget pull out all of your receipts and categorize them. I suggest you do this weekly in the beginning. The box can fill up pretty quickly, especially when two people are contributing.

Last but not least give each category total a “category to income” percentage. For example look at your life though the eyes of a Lender. You should spend no more than 31% of your net income on rent or housing and that includes your mortgage payment, property taxes, insurance and in some cases homeowner association fees. If you’re spending more than 31% keep your true values. Once you tally-up all your actual category totals and convert them into percentages your “reality” picture is now painted. Hopefully you will not exceed 100%. However, if you’re over 100% seek professional help immediately because you are in big trouble and heading for a crash!

If the above process has you feeling overwhelmed don’t beat yourself up. Just make an appointment with a Counselor or Coach in your area they’ll be happy to assist you.

If you are going to set up a household budget, you’re going to need to prioritize your spending. You simply cannot buy everything you want. You have to purchase the things you really need first.

So, how do you separate your “wants” and “needs” so your household budget will be successful?

To set up a household budget you will need to do three activities:

- List your income.

- List your expenses.

- Set priorities and make changes so that your income will be greater than your expenses.

Listing your expenses is important because it allows you to see where your money goes. Setting priorities will help you control spending so it is less than your income.

You’ll need to keep an accurate record of everything you spend. Carry a notepad with you so you can write down the cost and short description every item you buy.

You can group individual items into categories to make your expenses more understandable. Keep recording your expenses for a full month.

After a month of recording everything you spend, you’re ready to set some priorities. This means that your household budget may reduce or eliminate spending for some items in order to make your expenses come below your income.

It’s always painful to begin cutting back. But, you will probably be the first to admit that your spending has been somewhat out of control.

So, are there objective ways to establish priorities within your household budget that can help minimize the pain of setting spending limits?

=== Objective Standards for Household Budget ===

Yes. The primary contribution of respected psychologist Abraham Maslow was a hierarchy of human needs. This prioritizing of needs can give you some guidance for setting your household budget priorities. This hierarchy has been described in the following form (starting with the most important level):

1) Physiological needs (food, water, sleep, personal hygiene)

2) Safety needs (employment, security of income, protection from violence, family security, health)

3) Love / Belonging needs (friendship, family relationships, social networks)

4) Esteem needs (recognition, self-respect, sense of contribution)

5) Self-actualization (ability to use your talents, creativity, appreciate life)

=== Applying The Hierarchy to Your Household Budget ===

In setting up a household budget, you should allot money for items that satisfy the physiological and safety needs before allocating money for needs at other levels. Let’s see how this works.

The physiological needs are the most important. You need food, water, sleep, and personal hygiene to survive. This helps set your household budget priorities.

Expenses related to these needs take first priority. Basic nutrition, shelter, and personal hygiene expenses take first place in your household budget.

Next in line are the safety needs. These needs include enabling you to support your family and keep them safe. Basic expenses for transportation to and from work, clothing for work, making your home and neighborhood secure (which include taxes), and health care are included here.

But, here is where you need to be careful.

Let’s look at some of the household budget items included in these first two areas such as food (basic nutrition) and transportation to and from work.

It is easy spend more money than is required to satisfy these basic needs. You may confuse expenses for basic necessities with money that would contribute to recognition and self-esteem (need levels beyond the basic levels).

For example, buying nutritious groceries and making healthful meals at home helps fulfill your basic physiological needs. But dining out in fine restaurants goes beyond the basic needs. Frequenting fast food restaurants may be convenient, but is probably more expense than a simple nutritious meal at home–and fast food is likely to be much less nutritious.

You could also consider transportation requirements for work. There is a basic level of transportation that fulfills the requirement to safely and reliably go between home and work. And there is a more luxurious, and expensive, level of transportation that fulfills the self-esteem needs.

In setting up a household budget you must carefully consider how much to budget to satisfy these basic physiological and safety needs. Reducing expenses for some items may be inconvenient and seem a little harsh. But, if there is money left over after satisfying these basic needs, you can allocate money to other levels of needs.

So, let’s say you do have money left over in your household budget after estimating how much you must spend to satisfy the needs in the first two levels.

You can then allocate money for “Love / Belonging needs”. These activities might include family entertainment, occasional dining out, or for a family trip or vacation. Other items to consider here are cable TV, Internet, and attending a movie. You could also include magazines and newspapers in this category.

If you have money in your household budget left over after allocating it to this category you can allocate money to items that fulfill the next category.

When the money you can budget runs out, you know that spending for items not yet covered will have to be deferred. This is the part of making a household budget that seems painful. But, it also relieves you of the anxiety of wondering when the bill collector is going to call or the court is going issue a wage garnishment order.

So, you can prioritize the items in your household budget in a fairly objective way using Maslow’s hierarchy of human needs. Maslow’s hierarchy of human needs will help everyone understand your household budget, give it their support, and make it successful.

Making a household budget may seem like a chore. An unreasonable and unnecessary addition to your already long list of duties. But the benefits of making a household budget greatly outweigh any disadvantages of having to do so. Here is why.

Have you ever received a letter from the bank telling you that your account is overdrawn? The charges incurred from the overdraft can be amazing. Most banks charge on average $35 for each item that is overdrawn. Making a household budget can save you lots of money in overdraft charges.

For example, if have gone over and you have five checks that come through you will be charged $35 times five which equals $175. Ouch!! Now most times the reason you go over is because you had more money going out than you did coming in and that $175 is going to cause even more problems.

This is the main reason why making a household budget is needed. A budget will help you to have a better understanding of your money. It will show you where it goes and it will help you to eliminate the overdraft fees and headaches.

Making a household budget doesn’t have to be difficult. I recommend you start out with one month. When you try to do more than that, you will build stress and you don’t need that.

Start out by collecting all of your monthly bills and your check book. You will need several pieces of paper and a pencil. Blank paper with no lines would work better, but any type of paper will work.

Write out all of your monthly bills, amount due, and due date. Here are some examples of monthly bills that are important when making a household budget:

Mortgage
Electric
Water
Insurance
Gasoline
Credit card
Groceries
Internet
Phone
Car payment

Once you have the monthly bills, amounts, and due dates you are ready to add the miscellaneous items. These items include the following.

Clothing
Vehicle Repair
Movie rentals
Entertainment

These things are ones that you could remove or do without if you had to, due to the money going to something else. These could also be one time items like registration fees for a sport or a birthday gift. You are almost down making your household budget.

Now you need to add all of these items up and add them to a different piece of paper. Add your income to the sheet as well. Now subtract your income from the amount of your bills. If you are in the black you are off to a great start, but if you are in the red, you need to reevaluate what you are spending your money on each month. You don’t want to live pay check to pay check and spend every last dime. You will want to have a cushion in your checking account just in case something happens.

Part of making a household budget is writing down the dollar amounts and what it was for, for every purchase you make. You need to do this with every purchase because you want to know where your money is going. You may have more than enough funds to cover your monthly bills but still have nothing in your account or over draw it. When you write down all of your purchases you will be able to figure out where the problem areas are and you will be able to fix them.

Making a household budget will help you to have more money each month and it will help you save for the future. Its also a great way to show you children show your children responsibility. Be sure to include them when making your household budget so that they will learn how to do it with their own money as well.