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There are many reasons people create home budgets to reduce monthly household expenses. For some people, household budgeting means paying off debt or making ends meet. For other people, it’s to save money faster and retire sooner.
Whatever the reason you want to reduce monthly household expenses, you must first understand where the majority of your money goes. There’s a good chance most of it goes towards housing, transportation and food.
Understanding where your money is going now will help you start thinking about ways to reduce your major household expenses. The more you can reduce monthly household expenses the less you will spend.
For some, this will mean being able to breathe a little easier or sleep a little better at night knowing they don’t have to count every penny they make. For others, this will mean being able to invest that extra money so their retirement fund can grow faster.
Regardless of which stage you are at in life, there are significant gains to be made by establishing a budgeting household.
Average US Household Expenses
According to the Bureau of Labor Statistics. Americans spend nearly 2/3rds of their money on three major areas: housing – 33%, transportation – 16% and food – 13%. Clearly, if you’re trying to cut expenses or save money faster for retirement this is where to focus cutting back on. Click to Tweet this.
*Data obtained from Bureau of Labor Statistics
Track Your Household Budgeting Expenses
If you are not sure where your money is going then it’s time to start tracking your expenses. Whether you use the results for household budgeting or not, tracking expenses gives you a better understanding of where your money is going now. For those preparing for retirement, knowing your current expenses will give you a baseline to start with for calculating your estimated expenses in retirement.
Reduce the Largest Budgeting Household Expense – Housing
For most people, housing expenses are where most of their home budget goes. It accounts for a third of a person’s monthly household expenses. Being able to trim this expense, even just a little, can make a big impact to your bottom line.
If you choose to own your home, a chunk of this expense will go away some day when you finally pay off your mortgage. You’ll always have to pay taxes and insurance on your home, so the expense will never go away entirely.
There are plenty of factors to consider with your dwelling place today that can greatly impact a budgeting household. Renting or buying a cheaper place of residence can make a profound impact on your expenses, so don’t stress about that $6 beer or $3 cup of Starbucks coffee you indulge in on occasion. For the most part, it’ll hardly make a dent in the larger picture.
When buying a home or renting a place consider what you must have as far as space and location is concerned.
When you’re young and renting it may make sense to spend a bit extra to live in the local hip area if you will be going out frequently to enjoy the social scene. This is especially true if you would otherwise be spending lots of money on Uber rides there and back.
Alternatively, if you’re more of a homebody who does not go out often living in a more remote area where the cost of living is less probably makes the most sense.
As your life evolves and you potentially settle down with a spouse and children, the recreational activities you do will likely change. The trendy area where you enjoyed the night life may not have adequate children activities and playgrounds to visit.
Saturday evenings that you would have spent at a bar or restaurant in your 20s may evolve into hanging out at a friend’s place and letting the kids run around. Lazy Sunday mornings with a hangover, may turn into taking your kids to swim classes.
When deciding on a location for your home, make sure any premium costs you may incur by living in a certain location will be fully utilized.
Don’t pay a premium to live near the beach when you never go to the beach. If you don’t have children, then living in a location with higher taxes due to the great schools in the area may not be the right decision for you.
Living Near Work
Don’t pick a location for your home based on its proximity to your job. Jobs can change at any time. Companies can downsize, relocate or close for good. Or, you may change your mind on what you want to spend the rest of your life doing.
There are many jobs where you can work from home full or part time. Companies where traditionally everybody went into the office each day now have work from home options once or twice a week. Prove you are a good worker and these benefits will be granted to you.
Of course, living near work may be right for some people. There are always exceptions. It may make sense to buy or rent near your job if you have your own business or just completely love your job and somehow know you will work there for the next 10-20 years.
The size of your place of residence can also make a big impact to your bottom line. With more and more people working from home once or twice a week, people want an office space where they live. That does not mean you need a room specifically designated as an office.
In lieu of a whole room, the kitchen table, a compact desk in the corner of the living room or even the couch could be used in a pinch as an office space. First, ask yourself how much money having a room designated as an office is worth to you. Then, calculate how much more a month it will cost you. It is up to you to determine the true value of that extra space.
Another common reason for an extra room is having a place for guests to stay when they visit. The true value of this could be significant for those with in-laws that drive them nuts or stay for extended periods of time. For others, who live in the same area as most of their family and rarely have guest stay over likely have little need for this extra space.
Be honest with yourself. The size house you have should fit your needs, not what society says you should have. If a room will simply be collecting dust most of the time, then you probably don’t need the space. Another idea is to use once space for multiple purposes. The home office could also be the guest room and home gym.
If you “own” your home, or rather the bank still owns it, you can occasionally refinance your mortgage for a lower interest rate. A lower interest rate can significantly help with household budgeting. The more years you have left on your mortgage the more money you will save.
When we bought our home, we only put 10% down so we had to pay an additional Private Mortgage Insurance (PMI) charge each month. The PMI charge would stop once we had 20% equity in our home. This could be achieved by an increase in property value or by paying 20% of our loan.
In the first 5 years of owning our home, property values in our area increased and we had completed a major bathroom renovation. There were still a few years left on our mortgage before we would pay off 20% of the original loan but we heard interest rates were low, so we reached out to our mortgage broker.
Not only was he able to get us a lower rate, but after an appraisal we were able to get rid of the PMI as well. When it was all done and said, we actually knocked off 5 years on our mortgage and only pay $100 more each month compared to what we used to.
Excluding the reduction in interest rate over the next 20 years, we saved well over $150,000 in overall fewer mortgage payments. While you will see the greatest rewards by refinancing early in your mortgage journey, refinancing for a lower rate will almost always save you money.
Reduce the 2nd Largest Budgeting Household Expense – Transportation
The true cost of car ownership is astounding when you factor in all the elements, especially on new cars. The value of a new car drops significantly when you drive off with it from the dealership. For those with car loans, there is often interest tacked onto the cost of the car. The cost to insure a new car is higher than a used car.
The larger the car, the more it costs to own. A larger car also costs more to get from point A to point B than a smaller car often would.
The additional cost of owning a larger vehicle may not be worth it when you factor in how infrequently you will fully utilize all the space. It may be worth owning a smaller car and renting a larger vehicle when you need it.
There are varying degrees of importance on a vehicle and ultimately it is up to you to decide. Just realize how much the cost is affecting your bottom line and make sure you are comfortable with it.
Reduce the 3rd Largest Budgeting Household Expense – Food
The cost of food has a big impact on home budgets especially if you eat out often. There is big money to be saved on food with some planning and upfront effort.
It’s easy to tell yourself there’s not enough time to cook every meal. While that may be true, you could save money with a well thought out system. With a good plan, you could have food ready to eat for every meal and only cook 3-4 times a week.
Get started with The Healthy Meal Prep Cookbook. It has 3 complete meal plans that walk you through shopping, prepping and cooking.
Smart grocery shopping can also save lots of money for a budgeting household.
The best way to get started is to track how much you spend on the big items, compare those items at various stores and determine what the best price is. The best price will be your stock up price (buy enough to last until the next big sale on that item).
It’s so easy to spend an extra $50+ a week on groceries if you are not being intentional with your shopping.
Reduce Other Household Budgeting Expenses
Addressing low hanging expenses is perhaps just as important as addressing the top 3 expense items. Low hanging expenses are often much easier to address too.
Review any membership fees you pay and decide if those are worth the expense. Gym memberships can be costly. With a little creativity you can get a great workout in from your home.
Also, look at any newspaper or magazine subscriptions you pay for. Then, consider how often you read them or if you could get the same or similar source of information for free elsewhere.
Additionally, consider sharing monthly streaming subscription fees with a family member or friend. Many platforms allow multiple users to be signed in at the same time.
Budgeting Household Expense Planning Worksheet
Ready to start tracking your expenses? I have created a comprehensive list of expenses for you to start tracking your current expenses with.
When you’re ready, you can then expand on tracking your current expenses into calculating what you will need monthly in retirement.
The worksheet provides:
- A comprehensive list of expenses people may incur each month.
- A place to track all your current expenses.
- A place to populate what you expect your future expenses will be.
- A “Things to Consider” column to track how expenses may change between now and retirement.
- A side by side comparison of current verses estimated future expenses.
- A calculation that turns what your future expenses will actually look like with inflation calculated in when you go to retire.
Reducing your household expenses can make a profound impact on home budgets. With a few tweaks, albeit some difficult ones, you could stop living paycheck to paycheck. Nobody said this was going to be easy. Good things rarely are.
For those looking to boost your savings rate for retirement, cutting costs is a great place to start. It essentially does two things.
- Teaches you how to live on less, so you won’t have to save as much.
- Increases your savings rate.
Making changes to your housing, transportation or food expenses will likely give you the biggest bang for your buck. Everybody’s situation is different though and only you can determine what the right tweaks are for your bottom line.
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