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 desire to keep spending under control. For individuals approaching retirement tracking income and expenses can help determine the needed income required for retirement planning.
A budget can be descriptive, in that it simply tracks a household's cash flows [note 1] or prescriptive, in which a plan of future spending is budgeted, and income and spending is controlled in an attempt to track the proposed 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 such 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 don't 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.
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.
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.
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.
|My Income||My Expense|
|Wages $3,200||Fixed Expenses|
|Interest/Dividends $100||Rent/Mortgage $ 1,000|
|Social Security $||Property taxes/Insurance $200|
|Other $||Cable $ 75|
|Car Payments $500|
|Car Insurance $100|
|Other loan payments $ 200|
|Health insurance $ 200|
|Savings $ 100|
|Gas/Oil Heating $ 40|
|Electricity $ 50|
|Water $ 50|
|Cell phone $ 100|
|Fuel/Transportation $ 150|
|Car maintenance $ 50|
|Personal expenses $ 50|
|Total Income $ 3,300||Total Expenses $3,115|
Example household budget
Below is an example of a descriptive household budget.
- The Department of Labor conducts surveys to determine how the U.S. populace spends its income. These are examples of a descriptive budget:
Average annual expenditures and characteristics of all consumer units and percent changes, 2008-2013
Source: Consumer Expenditures-2013
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Item 2008 2009 2010 2011 2012 2013 2008-2009
Number of consumer units (000’s)Note 120,770 120,847 121,107 122,187 124,416 125,670 Income before taxes $63,563 $62,857 $62,481 $63,685 $65,596 $63,784 -1.1% -0.6% 3.0% -2.8% Average age of reference person 49.1 49.4 49.4 49.7 50.0 50.1 Average number in consumer unit Persons 2.5 2.5 2.5 2.5 2.5 2.5 Average number in consumer unit Earners 1.3 1.3 1.3 1.3 1.3 1.3 Average number in consumer unit Vehicles 2.0 2.0 1.9 1.9 1.9 1.9 Percent homeowner 66% 66% 66% 64.9% 64.3% 63.7% Food 6,443 6,372 6,129 6,458 6,599 6,602 -1.1% -3.8% 2.2% 0.0% At home 3,744 3,753 3,624 3,838 3,921 3,977 0.2% -3.4% 2.2% 1.4% Away from home 2,698 2,619 2,505 2,620 2,678 2,625 -2.9% -4.4% 2.2% -2.0% Housing 17,109 16,895 16,557 16,803 16,887 17,148 -1.3% -2.0% 0.5% 1.5% Apparel and services 1,801 1,725 1,700 1,740 1,736 1,604 -4.2% -1.4% -0.2% -7.6% Transportation 8,604 7,658 7,677 8,293 8,998 9,004 -11.0% 0.2% 8.5% 0.1% Healthcare 2,976 3,126 3,157 3,313 3,556 3,631 5.0% 1.0% 7.3% 2.1% Entertainment 2,835 2,693 2,504 2,572 2,605 2,482 -5.0% -7.0% 1.3% -4.7% Cash contributions 1,737 1,723 1,633 1,721 1,913 1,834 -0.8% -5.2% 11.2% -4.1% Personal insurance and pensions 5,605 5,471 5,373 5,424 5,591 5,528 -2.4% -1.8% 3.1% -1.1% All other expenditures 3,376 3,404 3,379 3,382 3,557 3,267 0.8% -0.7% 5.2% -8.2%
Note: Consumer units are defined as families, single persons living alone or sharing a household with others but who are financially independent, or two or more persons living together who share expenses.
- Bogleheads® investment philosophy
- Budget models of retirement spending, the Bottom-up approach section contains representative budget worksheets (spreadsheets or printable worksheets) for retirement.
- How to Make a Budget and Stick to It, Nolo Press
- Sample Budgeting Worksheet, from MyMoney.gov
- Savings Fitness: A Guide to Your Money and Your Financial Future, by the U.S. Department of Labor (hosted on MyMoney.gov). Section 5 contains a detailed budget plan.
- How To Set Up a Family or Household Budget, HowToDoThings.com
- How to Set Up a Family Budget, eHow.com