5 Things Homeowners Should Know About Creating a Budget
Whether you’ve recently purchased your first home or have been living in one for some time, there are few things more important than a balanced budget. Everything from increased utility bills to much-needed repairs can put a pinch on your finances unexpectedly. A solid financial plan – and the wisdom to implement it – can ensure that you have the wiggle room you need when these unplanned expenses pop up. Here’s the scoop on what you need to know about building your first budget and why it’s never too late to get started.
1. There’s a Lingo
While the concept of a budget is simple (a plan for making and spending money), the terms used to describe a budget can be tricky. Common vocabulary terms for creating and using a budget include:
- Balanced budget: When your spending is equal to your earnings.
- Deficit: When you make less money than you spend.
- Discretionary income: The amount of income left after taxes and after you pay for your needs. Can be used for additional spending, saving, or investing.
- Disposable income: Money left after paying taxes that can be used for saving and spending.
- Emergency fund: Money put aside for immediate and urgent needs.
- Fixed expenses: Costs that stay the same each month.
- Needs: Items you must spend money on in order to survive, such as food and shelter.
- Personal income: Money earned from all sources, such as working a job, investments or benefit payments.
- Surplus: Having more money than you spend each month.
- Variable expenses: Costs that change each month, depending on usage or price fluctuations.
- Wants: Items you choose to buy because they add fun, value or enjoyment to your life.
Knowing these terms can help you become part of the conversation on budgeting and give you an advantage when speaking to financial professionals in your life, such as your accountant, loan manager or tax preparer.
2. It’s Not Rocket Science
Despite having a language all its own, the act of budgeting is not that complicated. Create a plan for spending in every category of your life (from streaming services to dental work) and don’t spend more than you’ve allotted for each category. To set goals and track spending, you can use something as simple as a Microsoft Excel spreadsheet, a Google document or even a plain old notebook. As long as it’s something you can edit when needed, and accurately update, it’s a useful tool.
You may also find some of the popular apps on the market to be good for budgeting on the go. Many smartphone apps are usually free or have free versions with basic functionality. For the ultimate in hands-off budgeting, look for a service that updates your budget automatically using information from your banking and credit card accounts. (You may be more likely to follow a budget if you don’t have to spend time tinkering with it.)
3. It Can Flex with Your Needs
Are you earning more money than you used to? Before you celebrate with a fancy dinner out, put your budget to good use. Update your income goals, spending plan, and savings strategy. Track how those extra dollars can be used in a way that helps you meet your long-term goals.
Even if you don’t have a raise on the horizon, it’s recommended you regularly review and revise your budget to make sure it still fits your lifestyle. Different seasons of life require different spending and saving goals. For example, you might amend your budget to start saving for retirement once you’re done paying off college loans.
4. Fees and Interest Count
While you’re tallying up what you’ll pay for groceries, electric bills, and credit card payments, don’t forget how much of your monthly income will go to interest and fees. While these are often not specifically broken out as a separate expense in some budgeting tools, they are a cost that should be in a category of their own. Watch this number over time and work out a plan to shrink the amount you must pay. If you have multiple credit cards or outstanding debt with a high APR, consider a consolidation loan with lower rates to save money on interest and fees in the long term.
5. Perfect Takes Practice
Most homeowners don’t get their budget right the first time, especially if it’s been a while since they’ve tracked their spending. It won’t take long to get an idea of what you’re paying for – everything from food to roof repairs. Try again and again until your budget and expectations are in perfect harmony. The payoff could be more money for funding your dreams, whether that be a new backyard pool or a kitchen upgrade.
Budgeting isn’t something people usually love to talk about, but having an open and honest discussion with the decision-makers in your household is a big first step to understanding how it works. Plan monthly meetings to go over what you did right last month and what could use improvement. Don’t let shame or fear of failure keep you from looking at that budget in the eye and trying again.