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When you need a household budget

A household has expenses that need to be funded by its members jointly. Creating a household budget is important because it shows where the money goes and how it is funded. A household budget can be different from a family budget. If members of the household are not part of the family, they are unlikely to have common savings. 

Household budget vs. Family budget, what is the difference

While families usually live together in the same household, not all households form a family. There are students that share apartments to save on rent, or friends live together because they like to. Sometimes multiple families form a joint household, to farm, cook and eat in a larger community.

students eating at a table, symbolizing the joint household
Photo by cottonbro from Pexels

In households like these, a joint household budget is important to plan income and expenses together. 

Income for a household budget is often called funding. Funding of the budget can be set equally or on a means-tested basis. Another option is to contribute a percentage of a member’s income.

Expenses for the household need to be determined and agreed upon. Such expenses will include rent, utilities, household supplies, food, and anything else that one uses jointly. For example, the household could own a car and share it with its members. You also want to make agreements on who can spend money on behalf of the household. All members that are permitted to spend money, need to know which expenses are planned in the budget.

You want to have also further agreements on saving for joint financial goals. If you have a joint house, then you want to save for eventual repairs. If you have a car you need to save for its replacement. It is uncommon that a household budget saves for the retirement of its members.

The household budget is related to the personal budget or the family budgets of its members. These related budgets need to plan for the retirement of the household members.

Benefits of a household budget

The benefits of budgeting apply equally to households or families. There is not much difference between budgeting for an individual, a family, or a household. In all cases, the goal is to manage money in-flow and out-flow in a controlled manner.

Benefits on the household level

If you manage your household budget properly, you can lower disagreements among members of your household.

Upfront conversations create clarity for everyone, what to expect. What lifestyle the household can afford is not a mystery anymore. With the discipline to stay within the household budget, there are no bad surprises about money.

Benefits on the personal level

Sharing some expenses in a household can make things affordable that you could not afford on your own. If you share rent, you may afford an apartment with a nice kitchen or a house with a garden. If you share a car you don’t have to pay for it to stand around 95% of the time.

Often the savings are big enough to enjoy the higher lifestyle and to save more money for retirement or medium-term purchases. Living in a larger household lowers expenses.

feeding a black piggy bank, symbolizing saving money for financial goals
Photo by cottonbro from Pexels

How to start a household budget?

As a household is a community, you need to have conversations with all members about what should be the joint expenses and what should be individual expenses. Make sure you document these agreements.

Next, you need to determine who can spend the money from the budget and how they need to document their spending. Spending needs to be transparent so that no two members spend on the same item independent of each other and a purchase is done twice. A cash envelope budget can be a simple way to ensure this.

Further, determine for which common expenses you need to build savings. Also, determine how these savings are kept. For example, one member could open dedicated savings account for this purpose. Determine how much needs to be contributed towards each savings goal each month.

Finally, you can calculate the budget total by adding up all the expenses and savings.

Now that you know the household budget total, you can decide who contributes how much to fund the budget.

From there on it is like any other budget, you need to track plan vs actual and make corrections when circumstances change.

If you want to run the budget very smoothly, you consider as part of the savings an emergency fund. Such funds can be tapped when unforeseen expenses arise, such as the winter is really cold and heating costs are much higher than anticipated.

A household budget example

I knew four students who shared an apartment and created a household budget. They arranged things flexibly. Each of the friends paid their rent directly to the landlord. Further, they agreed on having food basics, like bread, milk, butter, cheese, noodles, mineral water, salt, spices, flour, etc. replenished as needed. Sometimes they cooked together. 

One of them ordered the phone line and internet in her name. Another paid for TV service. A third for a cleaning service to come in every other week. 

The friends kept receipts for expenses on behalf of the household. At the end of the month, they added up their receipts and calculated the total expenses.  The total was divided by four and each subtracted their already spent expenses. In most months, the differences were so small that they were carried forward to the next month, instead of actually exchanged.

In addition to the benefits of their household budget, the conversations about joint budgeting, gave them inspiration to keep their student budget in order.

Why you should consider a household budget?

The purpose of a budget is to achieve clarity about money flows. Having a budget creates peace of mind about how much money one can spend without overspending. In a household with different finances, it is important to communicate about what things to pay for jointly and which expenses are private in nature.

Putting agreements in writing is important to avoid misunderstandings. Furthermore, you want to track monthly your actual numbers vs. planned amounts.

A joint household budget requires a joint level of responsibility and frugality. It is important to only commit the group to those expenses that have been agreed upon. If all play by the rules of the budget, all members of the household can win big, by lowering their individual expenses and having more money to put towards individual savings.

Done right forming a joint household can improve the lifestyle for all members and keeping a household budget is the tool to do it without major disagreements.

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