Start saving with a simple household budget

Let's be blunt. You cannot be a saver without a budget.

Why is that? Well, spenders who lack a spending plan, or a budget, do not track how much money is coming in against how much money is going out. Since we are all spenders (how else will you stock your refrigerator and coax Santa Claus to treat your kids well?), we all need a budget. Otherwise, we soon become debtors.

Luckily, creating a household budget to help you spend wisely and save for the future is relatively easy. The hardest part comes right at the beginning: figuring out where all your money goes.

Chart your spending

Before you decide how much you can spend each month on household items like groceries and gasoline, determine how much you're spending now--on everything. Do this by noting every single dollar you spend, from candy bars to the cable bill.

Dropped a dollar in the pop machine? Write it down.

Paid the babysitter $20? Write it down.

At the end of 30 days, categorize your spending.

Consider categories such as:

• Mortgage
• Taxes
• Auto expenses
• Utilities
• Communication
• Groceries
• Insurance
• Loans
• Casual spending

Total your categories and review the list. Surprised by what you've found? Most people discover that the casual spending category is much larger than they expected. And when they review what they spend their money on, they're shocked by the small items--coffee, magazines, fast food--that just add up.

Others are surprised by how much they pay for utilities or communication (cable, cellphone, data services, Internet).

Use the chart to determine where you're spending appropriately--and where you need to cut costs or re-evaluate the services you're getting.

Build your budget

What's great about the best household budgets is that they are simple. The categories are not complex and many of the costs associated with owning a home and raising a family are fixed costs.

So let's start with fixed costs. Fixed costs are those that do not change from month to month: bills like your rent or car payment. On a piece of paper, list your fixed costs, maybe:

• Mortgage or rent
• Utilities
• Insurance
• Car payment
• Loan payment

On your paper, write down all your fixed costs. It's worthwhile at this point to make sure you aren't overspending on some of those items, like your mortgage. Most financial experts suggest spending no more than 33 percent of your monthly net income on your mortgage payment. If you're far over that percentage, you may need to find ways to save money on your housing expenses.

Next, list your flexible costs. Flexible costs are those that can fluctuate from month to month, like groceries or utility bills. Those might be:

• Groceries
• Entertainment
• Personal care/health care

Now, write down all your flexible costs. Find your average monthly spending by reviewing your bills for the last three months. Use that as a bellwether to determine what your target spending should be each month, knowing that some months will be more and some less. But the closer you are to your target, the better.

Finally, end with two very important categories: savings and spending.

To determine your savings and spending amounts, establish how much money is left over at the end of the month. Subtract your fixed and flexible expenses from your monthly income. Hopefully you'll find a healthy amount of money left over. If your income comes up short of your expenses, something needs to change.

Save 10 percent of your income per month. If at all possible, sock away at least 10 percent of your income for savings, if not more. And set up automatic transfers to pay yourself first before you spend any extra money.

Have fun with the rest. Once you've taken care of your savings and your expenses, anything remaining is for fun. Enjoy it, because after all, you earned it!

Avoiding pitfalls

We said building a household budget was easy--and it is. Sticking to the budget is another story. To make sure you stay within the money lines, do your best to avoid these pitfalls:

• Loose cash. Even though you're sticking to your budget, you may find yourself spending loose cash--$20 here, $30 there--fast and easily. If so, and if it's breaking the budget, it's time to step back to phase one and chart where that money is going.
• Wants not needs. When you build your budget, you might include a line item for, say, Starbucks coffee. This is a want and not a need and should be seen as so. If your choice of coffee impinges on your savings, it's time to re-evaluate.
• Save your raise. When your annual salary receives a bump, or you receive an unexpected windfall, don't let it bump the line items in your budget. Adjust your spending for inflation, not for having more money in your pocket. Keep your budget the same and sock the raise into savings.

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