Household Budgeting vs. Personal Budgeting, What’s Actually the Difference?
People often use the terms household budget and personal budget interchangeably. This is not accurate. In some cases, a person living on their own can actually use them as the same thing but in most cases the two are different. The main difference between a personal budget and a household budget is that the first pertains to the financial income and expenses of only one individual. The second is based on the income of more than one individual and the expenses they each share.
What’s in a Typical Household Budget?
Typical household budgets have several things in common. First, every adult that has income available for keeping the house running is considered. All income is recorded and it is the total amount that all members bring in that is considered when determining how much is spent where.
The expenses to include in a household budget are housing (rent or mortgage), shared food, utilities, house insurance, and car expenses if the vehicle is shared by more than one person. If the household includes children, their expenses are included in a household budget if everyone is responsible for their care, such as the household consisting of two parents and the children. In essence, if an expense is necessary to keep the household members in the home fed and comfortable, which includes lights, gas, and water, the expense is included.
Finally, if it is agreed that more than one household member is to share something like the Internet or cable, that is also included. It is further understood that everyone must contribute to items such as laundry soap, bathroom tissue, and other normal living expenses. Things like furniture and appliances can be tricky and it will depend on whether the household members are all considered responsible for large expenditures and repairs or if there is one head of household member that shoulders that responsibility.
What’s in a Typical Personal Budget?
Personal budgets are based on the income and expenses of one person. These budgets include things such as clothing, personal savings, personal transportation expenses, and personal health insurance that isn’t included in a policy with someone else. It can also include personal life insurance.
If the individual is the sole household member, it will also include all of the housing and utilities expenses. However, if a person shares household expenses, a personal budget will only include their portion of those expenses. For example, an individual shares a house with three other adults. Each has their own income and they divide the household expenses four ways. Rent for the house is a thousand dollars a month. When this individual prepares their personal budget, they must include $250 for housing.
What’s The Difference?
Both budgets are similar and often overlap, but in most cases, a person should have both types of budgets. The exception to this, as mentioned earlier, is when one person lives alone and is responsible for all household expenses, as well as personal expenses. This person, however, may want to create a personal budget for dividing up entertainment costs, savings, and debt reduction. Some other major differences include:
Household Budgets are a Collaborative Effort of Multiple People
No single person should ideally decide the household budget alone. Because a household budget is based on multiple incomes, the budget should be a collaborative effort of everyone involved. Whatever way you go about it, a budget that doesn’t take into account how every participant feels and can realistically contribute is bound to fail. If only one member of the household is mathematically inclined, they can work up a household budget, but every adult who is to be affected by that budget needs to be allowed input and must be in agreement. Without everyone being on board, a household budget will not work. Personal budgets, on the other hand, are just that, personal. Only the person in question needs to feel comfortable with the end plan.
Personal Budgets can (and should be) used by each member of a household
Consider what things you purchase for your own use and then consider what is paid for the benefit of everyone living under the same roof as you. That is the difference between personal and household expenses. Going back to the example of the household with four adults: there would be one household budget that includes all shared household expenses Then, ideally, there would be four personal budgets, one for each of the individuals.
Note: while we talk mainly about adults in a household, children can be given a personal budget of their own. If they are given an allowance, that is their income. Their expenses would be anything they are responsible for purchasing from that allowance, such as video games or memberships they want. Older teens who have part-time jobs may also benefit, especially if they are trying to save for things like college or a car, or are responsible for a portion of the household bills. Starting children early helps them learn the benefits of managing money. Many parents help kids with a personal budget by having them put a certain part of their allowance into savings, part into giving, and then the rest for spending.
Household Budgets Control Group Expenditure Not Personal Expenditure
Household budgets are strictly for things that are to benefit all household members. Your daily stop at Starbucks would not be part of the household budget but would be part of your personal one. When you have items that could be either household or personal, such as transportation or insurance, you need to ask who benefits from the expenditure?
Is the car something that everyone shares or does one member of the household use the car and others rely on public transportation? In the first case, the transportation and related car expenses would be considered household expenses. In the second case, the car owner/driver would include all expenses related to the car in their personal budget, even if they gave an occasional ride to other household members.
Insurance, particularly life and health insurance, is another item that you need to examine before deciding in which type of budget it should be included. If the household consists of a couple and their children, then insurance plans are most likely meant to cover everyone and should be included in the household budget. In the above case of four unrelated adults, both types of insurance are likely to only be for one individual. In that case, the insurance would be a personal budget item.
Individual Responsibility vs Collective Responsibility
Another way to look at the differences between the two kinds of budgets is to look at responsibility. Are you the only one responsible for an expense? If so, then that falls under personal budgeting, If someone else shares the responsibility, then it is a household budget that comes into play. Basing things on responsibility can make things a little trickier until you sit down and define responsibility and agree on who is responsible for what.
In a single person household or one-income family household, the responsibility is fairly defined. When there are two incomes in a family household, maybe one partner’s income is determined by both to be excluded for one reason or another. In a household with unrelated adults, the responsibilities may not be such that all household expenses are evenly divided. In this case it may be necessary to modify what goes on the household budget and what goes on personal budgets. Let’s look at two examples.
A: Three people share a household. Each has an income. Individual 1 lived there first and is purchasing the home. They agree that the others live there but Individual 1 alone will take care of the mortgage and property taxes. Individual 2 is responsible for electric and internet service, and Individual 3 is responsible for heating. In this case, the household budget becomes split and the items are part of individual budgets. Yes, they benefit every household member, but not every member is responsible for a portion of every bill.
B: The same three people share the household but Individuals 2 and 3 pay a flat fee of $300 a month to Individual 1. This covers room and board. In this case, the responsibility for the household budget is entirely on Individual 1, and the amount paid by the other two people is added to this person’s income. The two other individuals each put their $300 dollars in a personal budget.
Individual Goals vs Group Goals
An excellent way to determine whether expenses such as savings, debt reduction or giving should be on the household budget or the family one is to figure out whether the money is to take care of a personal goal or if it is to be a household goal. Two people may get married and each have child support payments for a previous relationship. They need to decide whether to combine these payments and consider it a household expense that both contribute to equally or if they will each keep their own responsibility and make the payments separate, making them personal budget items. On the other hand, the entire household wants to spend a week next summer at a beach house. In this case, any money saved for this vacation week would be part of the household budget.
Most people can benefit from both a household budget and a personal one. The items that go in each budget are largely determined by who is responsible for the expense and who the item benefits. Everyone involved in a household budget needs to be in agreement or the budget will not be successful. Both types of budgets often overlap but in most cases, the personal budget is an item like savings or personal expenses that is included in the household budgets. The two can normally only be completely combined when one individual is the sole household member or there is only one adult responsible for running a household.