It often takes several weeks before a well-kept household budget becomes a habit. But how long do you have to persevere at least so that your household budget really delivers meaningful results?
A household budget must be maintained for at least three months to provide meaningful results for smaller expenses or everyday saving potentials. For large expenses such as a car or a house, the household budget must be maintained for at least a year.
I have been keeping a household budget since 2013, and in this article, I’ll explain how long you need to maintain the household budget at least to get the most out of your efforts. Additionally, I will explain why you might want to keep a household budget for a lifetime.
From my own experience, I know that a household budget becomes more accurate and thus more meaningful over time. Initially, I found it difficult to consistently record and categorize all expenses properly. But following the motto “learning by doing”, it’s important to start right away, even if it’s not perfect at first. But how long do you need to persevere to get the first meaningful results?
Why Three Months is the Absolute Minimum
A household budget should be kept for at least three months, as it is initially kept inaccurately and many entries are forgotten. Moreover, some expenditure and income categories do not occur every month.
As previously described, you will forget a few expenses in the first month. It often takes at least two weeks for a new habit to become routine, and for you to automatically keep your household budget out of habit.
From my own experience, I know that not all categories of expenses and income occur every month. For example, I do not buy new clothes every month. Thankfully, a car repair is not required every month, and I do not have monthly costs for a medical service such as dental cleaning. Also, I do not have a birthday every month, so I do not always receive gifts from the family.
The longer you keep a household budget, the more likely you are to have recorded some irregular expenses and income. Even these irregular incomes and expenses can have a significant impact when viewed over the year.
The second and third month are often of high quality in terms of accuracy. Moreover, some of the less regular categories have already occurred. From a recording duration of three consecutive months, expenses that occurred at the very beginning or end of a month no longer have as much impact on the statistics of a single month.
Example: If I fill up my car on the last day of the month, this naturally has a negative effect on the current month. However, I will not have to go to the gas station as often the following month. From a household budget period of three months, it’s easy to average out larger amounts at the very beginning or end of a month have less of a distorting effect.
What you can recognize after three months
Three months is a good period to get a feel for your own spending behavior and income structure. In detail, you can usually get the following information:
- Income: How much money is coming in each month? After three months, you have a good overview of how much money is actually reaching you.
- Regular fixed costs: The household budget already contains most of the fixed costs after three months such as rent, credit installments, operating costs of the apartment, but also broadcasting tax, internet, mobile phone, and subscriptions like Netflix. You can then already find out whether your fixed costs exceed the recommended portion of income. Some fixed costs like insurance, which are paid annually, may not yet appear in the household budget after only three months.
- Variable expenses: Variable expenses fluctuate from month to month. These include expenses such as dining out, takeaway coffee, hobbies, shopping, and clothing. You can usually save the fastest with variable expenses. Holidays and larger one-time purchases may still be missing here. Therefore, you should keep your household budget for at least a year. More on this later in the article.
- Typical monthly total expenses: After three months, you know your typical monthly expenses. These are made up of fixed expenses and variable expenses. You need the monthly total expenses to determine the savings rate. It’s best to average the months.
- Savings rate: After a few months, you know how much of your income you can “typically” set aside. The savings are calculated from the total income minus the total expenses. Read here how you can calculate the savings rate in percent.
- Recognize patterns: With good categories, you can already recognize patterns very well after just three months. Do you spend more on coffee and dining out than you thought? Is partying at the end of the week more expensive than you thought when viewed over a month? Recognizing these patterns can help you optimize your expenses and is an important basis for budgeting.
A household budget with information on three months can already help very well with financial problems, but also to get a rough overview of the expenditure and income structure.
However, since by no means all income and expenses occur in three months, and unforeseen events do not always occur, no long-term financial decisions such as a house or car purchase on credit should be made with the data.
Seasonal and once-yearly expenses are rarely recorded in a household budget in only three months. These include vacations, taxes, insurance, and Christmas gifts. From personal experience, these can have a large (negative) impact on the savings rate.
When should you start with the household budget?
The best time to start is right now. Think about the expenses you made yesterday and today and note them down in an Excel sheet or in an app like EH. After that, consider how you can group these expenses into categories. Tip: Categories like “Amazon” are not useful, instead use categories like “Groceries”, “Eating out”, “Rent” or “Hygiene products”. Read here for the best way to start a household budget.
It is not sensible to wait until the 1st of the new month. If you’re really serious about elevating your finances to a new level, then start now.
Why it pays off to start today:
The income-expense entries in the first month are often chaotic and incomplete. For example, I often forget the 2 € coin at the car wash or the 4.40 € at the bakery. The first month is often a phase of learning and adjusting. The main thing is to regularly remind yourself to keep the household budget and to figure out how best to capture and categorize expenses.
The sooner you start with a household budget, the faster you have trained the habit of income-expense tracking, found the right categories, and can thus benefit faster from the advantages of a well-kept household budget.
At least one year for life planning
From my own experience, I can confirm that it pays off to start income-expense tracking as early as possible. The sooner you start, the sooner you have an overview of your annual income and expenses.
For which planned expenses should the household budget be kept for at least one year?
- Purchase of an apartment or a house
- Major renovation and repair work in the house
- Long-term expensive rental contracts
- Buying a car
Your own living space and car are often the second and third largest expenses for most people. Here it is worth paying particular attention to financial feasibility. Smart decisions can have a significant impact on future wealth.
Both your own apartment and house, as well as your own car, require regular expenditures. These occur even after the actual purchase. This means that not only the original purchase price must be affordable, but also the following regular payments. A household budget helps you figure out how long you need to save the purchase price, or whether you can afford the subsequent ongoing costs at all. A household budget reveals what really remains with the current lifestyle.
For me personally, it often doesn’t matter anymore whether one can afford a particular thing. Instead, with the knowledge from income-expense tracking, I can quickly figure out whether I want to afford a particular thing.
Suppose you know from your household budget that you have an average of €1000 left in a month. So, for a €3000 offer for the wedding photographer, you can decide for yourself whether the service is worth three months of your life.
I was shocked when I saw how much I spent over a year, even though I thought I lived quite frugally. Likewise, financial contributions from the family (birthdays, Christmas, operating cost participation) can also have a strong impact on annual income.
In my household budget, I could see that just a few months with large expenditures had a huge impact on the annual performance. The many frugal months with an income surplus were wiped out by a few months with large expenses like a long vacation, a new camera, and tax deductions.
The Long-Term Benefits of a Household Budget
Maintaining a household budget for three months is better than not having one at all. Keeping a budget for a year is better than having one with just three months’ worth of information. But why should you keep a household budget in the long run?
Keeping a household budget for several years has many benefits. Over time, it becomes less of a chore and more of a habit. Also, the categories have long been established, and it only takes a few minutes to record entries.
A multi-year household budget helps you identify the long-term trend of your income and expenses. It can also help to realize if your income situation is developing below average.
It also helps you detect “lifestyle inflation”. Lifestyle inflation refers to the phenomenon where a person’s expenses increase as their income increases. This can result in no significant increase in savings or investments despite higher income, as the additional income is offset by higher expenses.
These expenses can arise in various areas, such as more expensive cars, larger apartments or houses, dining in upscale restaurants, or luxurious vacations.
A household budget can help identify lifestyle inflation, as it provides a clear picture of income and expenses. If you notice that your expenses have risen over time in relation to your income, this could be a sign of lifestyle inflation. A household budget helps you identify these trends and can assist in making conscious decisions to achieve your financial goals.
Most financial goals are of a larger nature, which can only be achieved over a period of many years. Focused action and detailed knowledge about your finances help you achieve these goals more consistently. The household budget is your personal financial companion.
What Else Should be Done in Addition to the Household Budget?
In addition to the household budget, I recommend regular wealth tracking. This means you know your exact wealth at a specific point in time.
I do this once a month, typically on the 15th of every month. I have written a detailed article on how to start wealth tracking today. This will give you absolute financial oversight.
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