Establishing a household budget is useful to have an overview of our family’s income and expenses
The basis for keeping the family financial situation up to date is always the family budget. It enables us to know how much money is coming in and how much is being spent, subject to different units of time, usually, month for the short term and year for the long term. The most important thing is that it will provide us, in a simple way, the possibilities we have to adjust the budget.
Therefore, the objective of the budget is to know in an easy and simple way, and at any time, our financial situation in order to facilitate our decision making.
To start drawing up our budget, we must first consider how we order this income and expenditure on a time scale. As we have already mentioned, it is normal to have an annual budget and to subdivide it into months:
Monthly: The main source of income is the payroll, and with it the basis for covering the expenses of the period.
Annual: This allows us to plan the income and expenses that are not collected or paid every month.
From this monthly and annual structure we will start to build our budget. The first key is to gather all the information. This research work is relatively simple, is mostly done through the bank (direct debit or card). In fact, many financial institutions even classify card charges by type of establishment. We should pay attention to important cash expenses such as food.
After locating them, they are transferred to a system that allows us to manage, change and adapt the inflows and outflows of money. Although there are all kinds of programmes and applications, we can do it in a simple way using a spreadsheet where we can write them down, but not directly, but we have to do a previous work in which we differentiate:
Income and expenses known in their amount and date of collection or payment: For example, the salary, IBI bill, car insurance, mortgage or rent, etc.
Estimated income and expenses: other types of cash inflows and generally outflows for which we do not know the exact amount.
These are important items such as food, basic services (electricity, water or telephone), clothes, leisure, etc. In this case, we should make an estimation exercise based on what has been spent in previous years and apply it, if possible, on a monthly basis.
With this structure we have already taken a first step that provides us with vital information: to know the totality of our estimated income and expenses, and if there are start-up imbalances, but this information, although so important, is insufficient, and it is necessary to classify them by their typology:
In revenues:
Recurring non-financial income: This is mainly the salary or income generated by the self-employed. These are stable items, especially in the case of salaried workers, which are distributed throughout the year. Rental income would be included in this category.
Non-recurrent non-financial income: Extraordinary income, such as bonus payments.
Financial income: Derived from returns on an investment or savings product.
In expenses:
Fixed obligatory expenses: These are those expenses that are generated regularly, we know their amount and either they cannot be reduced or it is very difficult to do so, on many occasions they require prior expenses, such as the mortgage payment.
Obligatory variable expenses: this category includes all the expenses that we are obliged to pay, such as electricity, food, clothing, telephony, etc., but whose amount is not fixed each month. They cannot be eliminated, but they do allow for adjustments of greater or lesser importance, which can reduce their amount.
Non-obligatory expenses: All those expenses that can be eliminated or postponed at a given moment of financial difficulty, mainly those related to leisure and free time.
If an adjustment has to be made, it may be tempting to use financing (loan or credit card), but this is an option that involves increasing expenses and may damage the future sustainability of the budget. Therefore, the first mandatory step towards balanced finances is to adjust on the income side, the expenditure side or even both. On the income side, these adjustments are usually not easy and in many cases require selling assets, while another, but more complicated, option is to increase income from work activities, such as overtime.
On the other hand, potentially all households can adjust their expenses to a greater or lesser extent, and this is where we see the usefulness of classifying expenses by their nature and identifying those that are most likely to be eliminated, postponed or modified.
Therefore, we will always start with the category of non-obligatory expenses, then, even if the reduction of these expenses is sufficient to balance the budget, we must analyse whether we can improve those variable obligatory expenses such as food or clothing services. In this case, the objective is an improvement that leads to their reduction. After analysing these two items, we can see if there is any possibility of improvement in some of the fixed compulsory expenses. For example, the mortgage payment, if there is such a possibility, although on many occasions it is necessary to face some initial expenses in order to achieve these savings in the medium and long term.
Achieving this adjustment is not easy in many cases, but it must always be based on our own critical judgement. For this reason, it is important to list the basic needs that must be covered each month and those that are not, and to be aware that small or large efforts in expenditure items can bring important benefits. It is also very important that we weigh up possible future expenses, especially those of a significant amount, as they may condition the ability to pay basic expenses, for example, holidays should be budgeted for, included in our document and their viability analysed. We must also take into account payment due dates to ensure that we have the money to pay them.
The objective is always balance and, if possible, a small margin of money that allows us to cover other expenses, whether unforeseen or planned, with our own resources.
