In some instances, overwhelming debt develops when consumers are unaware of how much they are spending. Other common reasons include job loss or health problems that drastically reduce available funds. Whatever the reason, when debt starts to consume your life, bankruptcy can provide a fresh start and a clean slate to begin rebuilding your finances. People oftentimes become overwhelmed with debt due to unexpected medical problems, divorce and other life events. One way to become more aware of your finances and prepared for unplanned events is by starting a household budget.
Household budgets are worth the effort to create because it enables you to keep track of what you’re spending your money on and identifying ways to save, too. Below is a guide for beginning a household budget that can act as a helpful tool for managing your finances before, during and after bankruptcy.
Steps for Creating a Household Budget
Step 1 – Create an Expense Flowchart.
This may sound complicated and time-consuming, but it’s not! Begin by creating a spreadsheet containing all of the different categories that you spend money on (i.e. mortgage, car loan, student loans, food, clothing, etc.) each month. Track every purchase you make in that spreadsheet for one month. Once you have those documented, you add them up and subtract your total expenses from your monthly income to determine if you have more money coming in than going out.
If you for some reason have more money going out each month than coming in, you will need to adjust your household budget to correct this deficit. If you need a simple spreadsheet to track expenses, this weekly expense tracker can help you get started.
Step 2 – Adjust Your Spending Habits.
If you are spending more than you make, it is time to review your expenses to determine if there is room to make adjustments. Begin by noting what items on your list are essential living expenses (groceries, utilities, gas, etc.). The items that aren’t noted are areas where you can begin cutting back.
Step 3 – Allocating Your Income.
The next step in creating a household budget is to allocate your income to necessary expenses. Review your monthly expenses to calculate the percentage you are spending on each expense compared to your monthly income. For example, if your mortgage payment is $1,200 and your monthly household income is $4,000, you are spending 30% of your monthly budget for shelter ($1,200 divided by $4,000). After calculating the percentages for each expense category, you may wish to compare your percentages to this list of recommended percentages financial experts recommend. These percentages may not work for every situation, but it may be a good starting point for you. So, if your expenses are higher than recommended, there may be an opportunity to reduce those costs and lower your percentages.
Step 4 – Create a Household Budget.
Based on your expenses, monthly income and the answers above, you can create a monthly budget for your household. Once finalized, continue to track your expenses each month by creating a household budget. There are many free and paid online budget tools you can use to create your budget and track expenses (i.e. LearnVest, Mint, QuickBooks, etc.).
Continually tracking this information will help you remain aware of your financial status and keep your family on the right track.
What Should I Do to Prepare Myself For Other Uncontrollable Life Events?
Life is full of curve balls. Your monthly budget can’t prepare you for everything life has in store. For example, unemployment, medical emergencies or loss of a spouse can easily throw the best budget into chaos. One thing you should work on building, if possible, is an emergency savings fund. If you are thrown something in life that causes major strain on your finances, having this emergency fund will provide a cushion to catch you if you fall. Six months’ worth of living expenses in savings is often considered the lucky number, but the more you are able to save, the better!
For more related information and tips on managing debt, sign up for our monthly newsletter.