I have been keeping a household budget since 2013. This means that I write down all the income and expenses of a month and categorize them. Regularly maintaining a household budget definitely requires some ambition and effort. Is this time investment worthwhile?
The benefits of personal income and expense tracking lie in the precise recording of all income and expenses, the resulting knowledge of what one can afford, the potential to find hidden money guzzlers, and the exact knowledge about the income and savings rate.
In this article, I want to show you the benefits I have been able to recognize with my household budget for over 10 years:
Know Exactly What You Can Afford Today
One of the biggest advantages of a household budget is that you always know exactly what you can afford. Whether you need a new car, are buying a house, renting a larger apartment, or dreaming of a vacation, these major expenses must be in line with personal wealth and the balance between income and expenses.
A household budget as an income-expense tracker allows you to know exactly which expenses are possible and which are not. Depending on the expenditure, however, the household budget must be maintained for a certain minimum period of time. As a rule of thumb: at least three months for small expenses, at least one year for major expenses. In this article, I will describe exactly how long you need to keep a household budget.
Know How Much Money is Left Over
Anyone who regularly keeps a household budget knows exactly how much money is left over at the end of the month. Since every month is different, it is worth keeping the household budget for a longer period of time. You will get the most benefit if you keep your household budget up-to-date well before the actual purchase decision.
This allows you to check whether the desired loan installment is affordable, or how long you have to save for the desired expense.
Once you have a complete household budget, you can find out within a few minutes whether the desired item is affordable. You can also quickly calculate what part of your future savings you must sacrifice for it. You also see how the planned expenditure affects your future wealth.
Because I know thanks to my household budget how much money typically remains for me in a month, I know exactly how long I have to work for a larger expense. This way, I can easily decide whether the expense actually delivers added value.
Sometimes we also make larger expenditures in order to save more money in the future and increase future wealth. The new electric car may require less maintenance and energy and is cheaper in tax. Perhaps the expensive photovoltaic system will help you reduce your future electricity bill.
Whether you can save money in the future with larger investments can be recognized more quickly with a long-term and detailed household budget. This allows you to accurately determine your current costs and compare them with future savings.
Absolute Financial Control
A household budget, in combination with periodic wealth tracking, is your precise financial compass. Regular tracking of your income and expenses gives you a clear overview of the long-term trend of your financial situation. Thanks to wealth tracking and the household budget, you know exactly how much money and wealth you currently have, where it comes from, and where it goes. In this article, I describe exactly how you best implement periodic wealth tracking.
A household budget contributes to absolute financial control. In a household budget, all income and expenses should be categorized. You can do this easily with my Excel template or the EH app.
This way, you can see at a glance where your money comes from and where it goes. Without this categorization, with the many individual expenses that accrue over the course of a month, you would have no chance of recognizing what you’re actually exchanging your money for.
The Household Budget Helps You Achieve Financial Goals
Anyone who wants to achieve financial goals without regular income-expense tracking either needs to earn a lot or live frugally from the start.
Regardless of what you’re saving and investing for: If you record every expense in the household budget, you will quickly recognize which expenses are keeping you away from your financial goals. Conversely, a household budget shows you which income makes the crucial difference in getting closer to your ambitious financial goals.
Often, in retrospect, we can consider whether certain expenses were actually necessary based on the household budget. Many impulse purchases and expensive status symbols often only bring short-term joy. Here, you can read how impulse purchases and status symbols make you poor.
Find Opportunities to Save on Expenses
Keeping a household budget allows you to recognize savings potential. Expenses in a household budget should always be categorized. This way, you can recognize many small expenses that add up to a large amount over the course of the month.
A household budget helps you identify spending patterns. Many subscriptions (Subscription Services like Netflix and Spotify) add up to a substantial sum over the year, even if the individual amount per month seems harmless. Many services (but also leasing rates!) use inconspicuous monthly amounts to attract customers.
Anyone who eats out daily knows the inconspicuous amount on the bill, but these regular expenses can grow into a considerable amount. Coffee twice a day in the small shop next door (e.g., Starbucks) can especially become a real expense trap for those with a small income.
Even with a high income, regular income-expense tracking can help you identify lifestyle inflation. Just check to see if you have become a victim of lifestyle inflation.
Becoming Debt-Free and Staying Debt-Free
A household budget is an excellent tool to become debt-free or stay debt-free.
If you have debt:
The overwhelming burden of debt can lead to numerous sleepless nights and ruined days. A household budget helps you find those money guzzlers that make it difficult to reduce your debt.
Paying off high-interest consumer debt as soon as possible must be a top priority for your financial success. Thanks to a household budget, you will know within a few days where there is potential for savings. The household budget is especially good as a retrospective tool to objectively assess past expenses based on their necessity and to act accordingly in the future.
Staying debt-free:
A household budget shows you the trend that your finances have taken. Anyone who spends more than they earn in the long term will often wake up with a mountain of debt. A well-kept household budget shows you whether you are saving money or losing money every month. It is therefore something like an early warning tool. To stay debt-free, you should definitely look at and try out wealth tracking.
Knowing the True Costs
Do you know how much your house, your apartment, your pet, your hobby, and your car actually cost per month?
A household budget helps you determine the true costs. The categorization of expenses gives you an overview of how much you have actually spent on something, even with irregular payments. Without income-expense tracking, expenses for housing, cars, and hobbies are hard to estimate.
Example Car:
With a household budget, you know exactly how much money you spend on your car. Acquisition, insurance, tax, fuel / charging, tolls, parking, and repairs make the car one of the biggest expenses of our lives.
Example Housing:
In addition to rent or mortgage payments, there are also utility costs such as electricity, water, heating, maintenance, and renovation, which are often underestimated. With a household budget, you can answer the frequently asked question “Rent or buy?” based on your individual facts.
Example Pets:
Pets can be more expensive than you initially think. In addition to the obvious costs of food and pet accessories, there are also insurances, veterinary costs, vaccinations, and possibly expenses for pet care and groomers.
Reduce Financial Stress
Financial stress can arise from uncertainty, ignorance, and the feeling of losing control over your own finances. A household budget can help reduce this stress. Working daily with the household budget strengthens confidence in your own financial decisions. In case of “wrong” decisions, you become aware of the mistakes much faster and can thus more easily counteract them.
Planning a Career Break
Would you like to plan a career break for a certain period, travel around the world for a year or find peace in a secluded cabin in the forest in the far north?
Career breaks require a financial cushion and precise knowledge of the guaranteed costs. A household budget in combination with wealth tracking can show you exactly how long your career break is financially possible, or how long you still need to save to reach the required amount.
Taking the Step into Entrepreneurship
Taking the step into entrepreneurship requires thorough financial planning and management. A household budget can be a useful tool to facilitate this transition.
Often, you have to prepare for an irregular income. As an entrepreneur, income can vary greatly from month to month. A household budget can help prepare for these fluctuations and ensure that expenses can be covered even in times of lower income.
Through a household budget, you know how much money you need at least to survive. It is recommended, for example, to set aside savings for a year before taking the step into entrepreneurship.
Budgeting is only possible with a household budget
The household budget is the second pillar of budgeting. Budgeting means that you carefully consider in advance how much money you want to spend on certain things. A budget can, for example, be created monthly. A budget only works if you closely monitor your actual spending habits with the help of a household budget.
Plan Investment Decisions
The insights from the household budget allow you to plan investment decisions. Regular investments are an important activity in many cases to build wealth. For this, it is important to know how much money can actually be invested without endangering the lifestyle.
From my own experience, I know that some months close with a profit of a few thousand euros, and others without surplus. Through the household budget, however, I know exactly how much money I have on average for investments in my ETF savings plan for pension provision and for further investments in my company. Alternatively, one could, of course, also find out how much money is available, for example, for financing an investment property.
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