Household budgeting

Individuals establish a household budget in an effort to understand their cash flow- how much they make and how much they spend. A budget is a tool that can help individuals plan for desired purchases and establish savings for reaching financial goals. Budgets are often essential for people who want to keep spending under control. For individuals approaching retirement, tracking income and expenses can help determine the income required for retirement planning.

A budget can be descriptive, in that it simply tracks a household's cash flows The Department of Labor conducts surveys to determine how the U.S. populace spends its income. These are examples of a descriptive budget:

Living below your means
Perhaps the most important idea underlying the Bogleheads approach to investing is recognizing you need to save a significant portion of income every month to have enough money for a comfortable retirement. There is no substitute for spending less than you earn.

The Bogleheads approach to developing a workable financial plan is to have a sensible household budget - one that provides for needed expenditures, discretionary pleasures, savings for big ticket items, and savings for long term retirement planning. Avoid excess debt, such as credit cards and home equity loans. If you have this type of debt, pay off those balances first. Reduce expenses and unneeded debt so you can consistently set aside a portion of earnings for decades. If you do not save enough, no amount of financial trickery will provide the returns needed for a comfortable retirement.

The process of budgeting
Budget worksheets are available from many sources. Choose a format that you are comfortable with. The example below illustrates the process.

Income
Record your income in the left column. As you can see from the example below, there are spaces on your worksheet for other incomes sources that might fit your personal situation. As you record your income, be sure to consider whether income sources are continuous or whether they might stop in the near future. For example, if your receive unemployment benefits, keep in mind when you will stop receiving these benefits.

You also might want to make adjustments for income you receive on a yearly or quarterly basis, such as tax refunds or bonus checks.

Calculate your total income by adding the numbers in the left column. This number represents the amount of income you receive in a month.

Expenses
Next, list your monthly expenses in the right-hand column.

Fixed expenses: Begin by listing your fixed expenses. Fixed expenses are items you have little or no control over. You will pay a fixed amount for these expenses each month.

Flexible expenses: The next group is flexible expenses, which are expenses that you can control. When thinking about flexible expenses, think about what you need and what you want. This will help you to control your spending in this category. What are some ways that you could control the costs of these expenses?

Also, make sure to pay yourself first. Set aside money from each paycheck and put it towards your savings. You will notice in the example below that “savings” is listed as an expense.

Calculate your total expenses by adding the numbers in the right column. This number represents the amount of expenses you spend in a month.

Compare
Now, compare your Total income (left column) against Total expenses (right column). If your income is more than your expenses, you are spending less than you earn and are on the right path to live below your means.

Otherwise, you should replan your budget and reconsider whether or not you are ready to invest.

Example household budget
Below is an example of a descriptive household budget.