Congratulations on your marriage! As you embark on this exciting new chapter of life together, one of the critical aspects that you need to address is setting up a household budget. Navigating through financial responsibilities as newlyweds can seem daunting, but don't worry – we've got you covered. This step-by-step guide is designed to empower you to build a solid financial foundation for your new household. We'll walk you through creating a budget that caters to your unique needs, offering practical tips along the way. Let's begin this journey towards financial abundance, because an important aspect of a happy marriage is about understanding and managing money as a team.
Why Should You Create a Family Budget?
Creating a household budget as a newlywed couple has numerous benefits. First and foremost, it facilitates open dialogue about money, enabling you to understand each other's financial habits and goals. It also gives you a clear picture of your combined income and expenses, allowing you to allocate funds effectively and avoid overspending.
A well-planned budget helps in identifying areas where you can save, enabling you to accumulate funds for future goals such as buying a house or starting a family. Not to mention, it aids in debt management, keeping your credit score healthy. Beyond the practical aspects, budgeting builds financial trust and cooperation, strengthening your bond as a couple. Remember, it's not just about numbers on a spreadsheet - it's about carving your path towards shared dreams and financial security.
Here are some of the practical advantages to joining your finances as a couple:
1. Simplified Money Management: Combining finances can simplify the task of budgeting by pairing it all down to just one set of bills, accounts, and financial responsibilities. This makes tracking income and expenses easier and more efficient.
2. Economic Efficiency: Pooling your resources can lead to substantial cost savings. Shared expenses like rent, utilities, groceries, or insurance often cost less for two people than if each person paid for these things separately.
3. Shared Financial Goals: When finances are combined, it's easier to work towards shared goals like buying a house or saving for a vacation. It also becomes easier to plan for long-term financial security, including retirement.
4. Increased Borrowing Power: Joint finances often mean you'll have a higher combined income. This could improve your chances of getting loans or credit and might help you get better terms, such as interest rates.
5. Improved Financial Transparency: Combining your finances allows for complete transparency. This can lead to better financial discussions, as both of you are fully aware of your monetary situation, which can strengthen your relationship.
Joining finances is a significant step that requires a high level of trust and open communication. It's not a decision to make lightly, but for many couples, it's a smart move that can lead to significant financial and relational benefits.
Creating Your Budget
A lot of us can feel emotions of stress or anxiety when it comes to money. However, you can overcome financial stress by mastering budgeting skills and putting your money on autopilot so it does the heavy-lifting for you. Luckily, it's a skill that anyone can learn. If you've found budgeting difficult or disheartening in the past, we encourage you to try again with these tips. The key is to approach it incrementally and stick to your plan. With time, it will become easier and you'll feel more empowered to make decisions that align with your goals.
The following is our step-by-step guide to creating your household budget:
1. Identify all Income Streams
The first step in creating a household budget is to identify all of your income streams. Most couples start with their primary income, such as salaries or wages from full-time jobs. However, don't forget about any passive income you may earn, which can include dividends from investments, rental income from properties, or earnings through online platforms.
Moreover, if you receive cash tips in your line of work, or make money from side gigs like freelance work, babysitting, or selling handmade crafts, be sure to include these as well. They might seem small, but every bit contributes to the overall financial picture.
If you have been married before and receive alimony from a previous marriage, this is also a part of your income. Make sure all these sources are accounted for, as they will provide a more accurate representation of your total monthly income, which is the foundation of your household budget. (We'll get to that next.)
What if I 'm a freelancer?
We understand that if you're a freelancer, contractor, or any type of professional with an irregular income, calculating your monthly income can be a tricky ask. However, it's still possible to create an effective household budget, even with an unsteady income. Here are a few tips to help you:
1. Analyze Your Past Earnings: Look at your income from the past year and calculate an average monthly income. This approach can give you a baseline figure for your budget, even if it's not exact.
2. Use Your Lowest Earning Month as a Base: If you could also take the conservative approach by using your lowest-earning month in the past year as your base income for budgeting. This can help you avoid overspending during lean times. Any surplus to this base number can be contributed toward your household savings goals (we'll touch on this subject shortly.)
3. Create an Emergency Fund: A well-stocked emergency fund is even more crucial when your income is irregular. It can help you navigate periods of low income without derailing your budget or dipping into savings meant for other goals.
4. Adjust Your Budget Monthly: With an irregular income, your budget is not a set-it-and-forget-it thing. It's a living document that may need monthly tweaking. Be sure to review and adjust your budget as your income changes.
Remember, the goal is not to make perfect predictions, but to create a flexible plan that can help you manage your money effectively and achieve your financial goals.
2. Calculate Your Monthly Income After Tax
Next, it's time to tally up all of your pooled income and calculate your monthly income after taxes, or monthly net income. If one of the partners has a salaried income, be careful not to confuse this with their gross salary. The monthly net income is the amount of take-home pay received. For example, someone with an annual salary of $60,000 or $5,000 monthly may bring home closer to $4,000 monthly after all is said and done.
If you are self-employed or have income coming in from sources where taxes aren't automatically deducted, then you should be careful to set some money aside for taxes. The tax rules vary from person to person, so be sure to consult a tax professional to get an accurate estimate of how much of your income you should set aside for taxes each month (in percentages.) The remaining amount is your net income after taxes.
Why is this number important? Because this is the cash flow that you actually get to work with for your household budgeting purposes.
3. Start a Spreadsheet
When creating a household budget, it's a great idea to start a spreadsheet. For instance, you can start a shared spreadsheet on Google with your partner, so that everyone has access to the same information and stay on track with your goals.
Now that you have your combined monthly income, you can now begin to input data into your sheet.
You may opt to create your own spreadsheet that is customized to your needs, or even use a template such as this one or this one.
4. List All of Your Expenses
Next, create a list of all of your expenses. You can do this by going through your debit and credit card statements for the past several months. This will give you a good idea of how much you typically spend in certain categories, such as groceries, utilities, rent/mortgage, transportation, and entertainment.
The more months you can analyze the better, so that you can get a big picture of your overall spending. This can also help you identify quarterly or even annual costs that you may not otherwise make note of if you look at just one or two monthly statements.
Once you have listed all of your expenses, categorize them into fixed costs (those that stay the same every month) and variable costs (those that fluctuate month to month). Then, add up all of these expenses to find out your total monthly fixed cost and variable cost numbers.
5. Compare Your Income vs. Expenses
Now that you have an accurate picture of your income and expenses, you can calculate your total monthly cash flow. This is the money you have leftover to work with, after all expenses have been paid for.
Simply subtract your expenses from your combined income to find this number:
Monthly Cash Flow = Monthly Income - (Fixed Expenses + Variable Expenses)
6. Evaluate What Can Be Improved
How much money do you have left over each month? Take a moment now and tap into how you feel.
Do you feel abundant?
Do you feel shocked?
Do you feel anxious? worried?
Do you feel pleasantly surprised or totally dismayed?
While it's absolutely normal and expected to have emotional reactions toward money, try this as an exercise to remain as neutral as possible. A lot of us have a complex relationship with money, and an exercise like this can trigger us into a downward spiral. However, remember that you are about to embark on a journey of financial empowerment. If you're disappointed with your cash flow, instead, try to remind yourself that money is just a tool to help you achieve the lifestyle you want. You can and will make positive changes to get to where you want.
Alternatively, maybe you're pleasantly surprised. Maybe you have a surplus and your life is looking much more abundant than you thought!
Either way, this is a good opportunity to comb through your finances and feng shui your bank account. What can you improve upon? What expenses can you cut back on? Are there any areas where you're spending more than necessary?
This is a great time to evaluate how you can consolidate and reduce your costs, as well as reflecting on some of your spending habits with the goal of creating more breathing room for your money.
Here are some money-saving ideas:
Combine auto insurance policies for a lower premium
Add a spouse to a health insurance policy instead of paying for two separate ;programs
Take advantage of family discounts
Combine memberships for common online subscriptions such as Amazon, Netflix and Spotify
Consolidate your debt for lower interest rates and payments
File and pay taxes jointly
Cooking and eating more meals at home instead of eating out
Plan "no-spend" days and dates
Eliminate unnecessary expenses and subscriptions
7. Set Financial Goals Together
Now that you have a better understanding of your household budget, it's time to set financial goals as newlyweds. This will help guide your money decisions and keep you both accountable towards achieving your shared objectives.
Here are some examples of common financial goals for newlyweds:
Build an emergency fund
Save for a down payment on a house
Pay off student loan and credit card debt
Plan for retirement
Take a dream vacation together
Whatever your shared financial goals may be, make sure they are realistic and achievable. It's also important to regularly review and adjust your goals as needed.
8. Choose a Realistic Budgeting Plan
When it comes to budgeting, there is no one-size-fits-all approach. As newlyweds, you and your partner should discuss and decide on a budgeting plan that works best for both of you.
Some popular budgeting plans include:
The 50/30/20 rule: This involves allocating 50% of your income towards necessities, 30% towards discretionary spending, and 20% towards savings and debt repayment.
The envelope system: This involves physically dividing your cash into envelopes labeled for different budget categories. Once an envelope is empty, you can no longer spend in that category for the month.
The zero-based budget: This means giving every dollar a specific job or purpose, whether it be for bills, savings, or discretionary spending.
Find a budgeting plan that fits your lifestyle and financial goals as a couple. Remember to be flexible and make adjustments as needed.
9. Select an Expense Tracking-Tool
You've already written down all of your expenses, but you also need to continue tracking your expenses moving forward. While this part does require some continued effort, this is the critical part of budgeting. It allows you to hold one another accountable by watching where your money is going, making sure your money actions are aligned with your goals, and identify areas where you can save.
There are many expense tracking tools available, such as Excel spreadsheets, budgeting apps, or even just a simple notebook. Choose one that works for both of you and make it a habit to regularly update it with your expenses.
10. Automate Your Payments & Savings
Another helpful tip for managing your household budget as newlyweds is to automate your payments and savings. This means setting up automatic transfers or payments for bills, debt repayment, and savings contributions.
By automating these payments, you can ensure that they are always made on time and that you don't have to worry about missing a due date.
It also helps you stick to your budget by setting aside money for savings before you have a chance to spend it elsewhere.
11. Review & Update Monthly
Lastly, it's important to regularly review and adjust your budget. As life changes, so will your financial needs and goals. It's important to have open and honest conversations with your partner about any changes in income, expenses, or financial goals. This will ensure that your budget stays relevant and effective.
Budgeting may seem daunting at first, but as newlyweds, it is a crucial step towards financial stability and success in your marriage. By following these steps and making budgeting a joint effort, you will be well on your way to achieving your financial goals and building a strong foundation for your future together. Remember to be patient and forgiving with yourselves as you navigate this process together.
6 Tips for Successful Household Budgeting
Now that you have the basics of setting up a household budget as newlyweds, here are some additional tips to help you succeed:
1. Utilize Budgeting Tools
There's a wide range of budgeting tools and apps available that can help streamline the process of managing your household budget. These tools can assist you in tracking your spending, categorizing your expenses, and providing visualizations of your financial state.
2. Make Room for Fun
Budgeting shouldn’t mean cutting out all fun activities from your life. Make sure to allocate a portion of your budget for entertainment or recreational activities. This not only makes the budget more sustainable but also ensures that you continue to enjoy life while being financially responsible. Financial expert Ramit Sethi argues that households should dedicate 20 to 25% of their budget to no-guilt spending for expenses such as shopping, entertainment, and drinks.
Similar to dieting, being too restrictive and rigid often doesn't work in the long-term. Everyone deserves to use some of their money on things that they truly enjoy.
3. Create a Buffer
Unexpected expenses always arise, often when least expected. Therefore, it's wise to build a buffer into your budget. This could be a certain percentage of your income or a fixed amount that you set aside each month for unexpected costs. The goal is to build up an emergency fund without having to dip into it for every unexpected cost that comes up, such as a parking ticket.
4. Track Your Progress
A budget isn’t a set-and-forget tool. It’s essential to revisit your budget regularly, ideally monthly, and make adjustments as necessary. Go over where you may have struggled, highlight achievements, and go over your progress towards your goals.
It's also a great idea to look at the month ahead and adjust your budget to accommodate any changes for the month. No one expects your budget to look exactly the same from month-to-month, but it also means you'll want to stay flexible and charge up your game plan on the regular.
This allows your budget to evolve with your changing lifestyle and financial needs. Remember, the ultimate goal is financial stability and peace of mind.
5. Communicate Openly
As you work on your budget and hold monthly meetings, keep communication lines as open as possible.
A household budget is a joint effort, and it’s crucial to communicate openly and honestly with your partner. Be transparent about your financial goals, income, expenses, and any changes you make to the budget. This will ensure that both parties are on the same page and working towards the same financial objectives.
It's also important to be mindful not to allow money to become a point of contention. When you first join your finances and create a budget, there may be some financial skeletons in the closet. While it may be easy to shame your partner for what they may have done in the past, this defeats the purpose of being on the same team. Forgive one another for shadows of the past, and focus on creating and sticking to healthy financial habits moving forward.
6. Celebrate Milestones
Setting and sticking to a household budget is no easy feat, especially as newlyweds. Celebrate your financial milestones, whether it’s paying off a debt or reaching a savings goal. This will not only keep you motivated but also strengthen your partnership in managing finances together.
Incorporate an Estate Plan into Your Household Money Strategy
Creating a household budget is a crucial step in starting your new marriage on the right financial foot. The motivator for working on a budget is working towards your financial future, together. Your goals and objectives will be unique to your partnership; what constitutes a luxurious life for one couple will look completely different from another's.
Whatever your rich life might look like, there is one thing that is true for anyone: the importance of planning for the future and protecting your assets through an estate plan. This can include creating a Will, establishing Guardianship for any future children, and setting up Trusts for inheritance and assets protection purposes.
Don't let all your hard work go to waste, establish your estate plan today! Trust & Will provides affordable, easy-to-use estate planning tools for couples to secure their financial futures together. Find out how to get started. Until then, happy budgeting!
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