How to make a household budget that works

You’ve probably thought about creating a budget. Maybe you’ve even tried it. But budgets can be tough to make, and even tougher to stick with.

But it’s never too late to start a household budget. With a bit of legwork, a budget can set your spending and saving on the right track and help you build a solid financial foundation for years to come.

Here’s everything you need to know about creating a household budget.

What is a household budget?

A budget is your best estimate of what will be coming in and going out of your bank account. Basically, a good budget calculates your future income, expenses, savings, and more. It offers a framework on how to spend your money based on your long- and short-term goals. 

While a personal budget follows one person’s finances, a household budget will manage all of those factors for your entire household. So, you’ll be tracking the incoming and outgoing expenses for yourself and everyone you live with, whether that’s your family, roommates, friends, or just you and your dog.

Why is having a budget important?

When you don’t have a budget, it can be difficult to keep tabs on your spending (those online orders can add up fast). And it’s all too easy to let your savings fall by the wayside. A well-thought-out budget can have all sorts of benefits for your financial life — not to mention your peace of mind.

Here are a few reasons it’s important to have a solid household budget:

• Helps you work toward your short- and long-term savings goals
• Makes it easier to juggle multiple household expenses
• Keeps unnecessary spending in check
• Helps build an emergency fund
• Gives you confidence about your finances

When creating a household budget, it’s important to have a dedicated savings account so your money is safe — and can even earn you perks and interest.

How to make a household budget

Ready to take control of your finances? Let’s build a household budget that works for you and your savings goals. Here’s how to get started in six simple steps:

Step 1: Calculate your family’s net income

When creating a household savings budget, the first thing to know is how much money is coming in each month. You can keep track of your money with digital banking tools, such as the Canada Revenue Agency direct deposit feature. By setting up direct deposit, you’ll be able to receive tax payments and refunds right into your account. Once you have a good picture of all the money that’s coming in each month, you can calculate your family’s net income. Here’s how to figure that out: 

• Determine your family’s after-tax monthly income: Add up how much income each member of your household is bringing home each month after taxes. This includes their main income and any side hustles. If you’re self-employed or a freelance worker, your income may fluctuate from month to month. No sweat — just take the average of last year's monthly payments or make your best estimate.

• Determine your family’s total monthly expenses: Total up everyone’s fixed expenses. Think mandatory expenses that you pay regularly, like your mortgage or student loans.

Then, take your after-tax monthly income and subtract those total monthly expenses. That will give you your household’s net income each month. This will be the starting point that you build your budget around. 

Here’s an example of how that might work

In this example, Julie and Olivia’s net household income is $5,649 a month ($8,499 - $2,850).

The BMO savings calculator can help you visualize the long-term value of budgeting and savings, especially the power of creating a savings fund with compound interest.

Step 2: Track your family’s total monthly spending

Before you can build a family budget, you need to get a realistic sense of where your money is going.

There are a few ways you can track your spending. Your bank statements or your online banking portal can give you a breakdown of all your expenses. You can also track purchases or wire transfers if you want a holistic view of where your money is going. You’ll want to make sure to include both your fixed and variable expenses, such as:

Fixed expenses (cost the same each month)

• Rent/mortgage
• Loan repayments with a fixed interest rate
• Property taxes
• Insurance 
• Internet and cable 
• Car payments 

Variable expenses (vary from month to month)

• Medical expenses
• Groceries and dining out 
• Gas or public transit 
• Home improvements or repairs 
• Some utilities (such as hydro and gas)
• Discretionary spending (like clothing, entertainment, and hobbies)

One way to keep track of fixed expenses is to set up pre-authorized debit payments for expenses that are the same every month, such as bills. This way, the payment will go through automatically, ensuring you never miss a payment or incur late fees. Tools such as BMO’s PowerSwitch can help you transfer your recurring automatic payments from a different financial institution to your current one.

Once you’ve added up all your fixed and variable expenses for a few months in a row, you’ll start to get a realistic idea of your household’s total monthly spending range. While no one spends the same amount every month, a good budget will make room for fluctuations. 

Step 3: Set up a realistic monthly household budget

This is where the actual budgeting begins. One helpful rule of thumb is the 50/30/20 rule. It’s a quick way to divide up how you spend your after-tax income.

• 50% goes to necessities (rent, groceries, utilities, etc.)
• 30% goes to wants (streaming services, travel, fun dinners out)
• 20% goes to your future (savings accounts, paying off your credit card)

While the rule isn’t one-size-fits-all, it’s a good way to start thinking about your different spending categories and how much of your money should go toward each. For example, if you have a dream of retiring early, you might want to bump up that 20% number. If your costs of living are generally low, the necessities may not take up half your income.

You can also calculate exact numbers for each category to help you stay on track. For instance, Julie and Olivia’s net household income is $5,649 a month. That means they have $2,825 for rent and other living expenses, $1,695 to put toward fun things like that family vacation they’ve been planning, and $1,130 to put toward their retirement and children’s college funds. 

Step 4: Create a savings plan for your family

While many people tend to focus on the spending part of their budgets, saving is just as important. Whether you’re planning to buy a home or travel the world or something in between, a strong budget can help turn your savings goals into a reality.

Here are a few ways you can make the savings part of your budget easier:

• Decide why you’re saving. Choose a few tangible goals, like creating a safety net, saving for retirement, saving for your first home, paying down debt, or going back to school.
• Set realistic goals. Now that you know why you’re saving, you’ll want to set benchmarks for each. This can be a set amount of money or a timeframe to accomplish your goal.
• Make it automatic. Take advantage of features such as custom transfers into your savings account to make saving feel effortless. 

Step 5: Adjust your spending to stay within budget

Now comes the tricky part — walking the walk. Once you understand how much you should be spending, you’ll need to adjust your actual household spending to be in line with your new budget. 

Typically, your necessary expenditures are difficult to change. It’s possible to move to an apartment with lower rent or shop around for better insurance rates, but these things take time. Instead, it’s often easier to look at your discretionary spending and identify ways to cut back.

Adjusting your spending is all about identifying what is — and isn’t — a priority for you. Review your list of expenses and take a hard look at the “wants” to find ways you can potentially cut back. Could you consolidate your streaming services? Limit how many times you go out to eat? Stick to budget accommodations on your next trip?

No matter where you decide to cut back, it’s important not to go overboard. Major cuts or dramatic changes in lifestyle can make it hard to maintain your new budget. Instead, start small and make realistic shifts so your new financial framework is easier to follow.

You can make it easier to stick to your budget by using tools like BMO’s award-winning mobile app, which offers no-fee features such as BMO Savings Goals to help you track your progress.

Step 6: Review your budget on a regular basis 

Your budget isn’t just “set it and forget it”. You’ll need to regularly revisit your household budget to make sure it aligns with your current financial situation and goals.

One way to do this is by revisiting your savings budget after a set period of time, like once a quarter or halfway through the year. Another method is to take a fresh look every time you hit a new milestone, like paying off a loan or getting a raise. If you need help reviewing your finances, booking an appointment with an advisor is always an option.

It’s also important to regularly assess financial factors like your savings account. Certain savings accounts have helpful features and perks (like no self-serve fees, competitive rates, or family bundle options) that help you make the most of every dollar you save.

Final thoughts

Creating a budget sounds simple, but there are many factors that go into it. Your income, expenses, lifestyle, and priorities all impact your budget. But all good budgets have one thing in common — they help you make tangible strides toward your financial goals.