Step-by-Step Simple and Easy Family Budget
Family Budget: Where to Start
You probably know pretty clearly how much money comes into your household every month; the puzzling part is usually to figure out what happens to that money. A good family budget will solve that uncertainty and give you a clear picture of where your money goes, enabling you to take control.
The first step is to track all the family expenses, from the most obvious ones like rent, car payment, utilities, to the most volatile cash purchases, including all those for which you don’t get a receipt.
Where is My Money Going?
Most likely you already know if you have any money left at the end of the month, so the first budget will not reveal any unknown truth about the bottom line. However, the itemized list of expenses will provide you with precious information about your spending patterns. You can use this knowledge to take control and determine if there are any unnecessary expenses that can be eliminated or reduced.
Keep detailed track. For a month or so, make sure your family keeps every single receipt and writes down every purchase. This is necessary to see if you are operating over or under budget, and by how much.
Pay Yourself First
The first priority on how to spend your income should always be saving a portion of it to create a buffer in case of unexpected expenses, which means you should create and maintain an emergency fund. On top of that, you want to save some extra money in order to reach your goals, like afford a vacation to Disney or buying a new washer and dryer set.
Treat your savings like a bill; pay yourself at the beginning of the month, when you have your paycheck available. If you wait to see how much you have left at the end of the month to transfer to the savings account, you may have nothing or not enough.
A good starting amount to set aside monthly is about 5% of your family income, more if possible. You can make it an automatic transfer from your checking account to your savings on the payday.
No Amount Spent is Too Small to Track
Most people think that small purchases, like vending machines, can be overlooked, and it’s fine to exclude them from the budget. However, those little cash purchases add up pretty quickly.
Imagine a family of four. If each family member buys a $2.00 drink once a week from a vending machine, it adds up to $416.00 in one year, so the monthly budget should have an entry of approximately $34.00 for vending machines.
Each family member buys one soda a week
Each week $2 x 4
= $416 per year
─ Fixed Expenses
= AVAILABLE for everyday expenses
─ Flexible Expenses
= BOTTOM LINE
Crunching the Numbers of Your Budget
Once you have the load of information about your spending, you need to get it organized in a simple and efficient way. You can do it with pen, paper and calculator; use an electronic spreadsheet; or using commercial budgeting software.
Personally, I prefer to use Excel. I usually make my own simple spreadsheet, but Excel has several ready-made budget templates that you can use for free and have the formulas already built in - you can tweak the wordings to match your needs.
Create three broad categories of expenses: Fixed, debts, and flexible. Each category will be broken down into different items, as specific as you wish.
Who manages the finances in your household? Often one partner assumes the leading role in the family budget, either because he or she is good at it, has more time, or the other one doesn’t like the task.
It Takes Teamwork
However, it’s crucial that both spouses are in some way involved in the family financial planning. Only by getting engaged with the household finances, both can develop an awareness of the overall family financial status and work together as a team.
Fixed expenses should include your rent or mortgage, all major bills and utilities, daycare, etc.
Start entering your amounts in the budget spreadsheet. An example of spreadsheet is shown below.
Some bills are not monthly, but come up only bi-annually or annually, like insurance or home taxes. In this case make sure you divide them equally for each month they cover, for example if you water bill covers three months, you should budget and save for 1/3 of the amount every month.
Example of Fixed Household Expense
Mortgage or rent
Second mortgage or rent
Water and sewer
In the debts include all personal loans and credit card payments. Possibly pay off the whole credit card balances every month. If this is not an option, you should pay as much as you can above the minimum payment, to start decreasing those balances.
How Much Money is Available for Daily Expenses
The first important amount to find is how much is available for the family’s everyday expenses after all the bills and fixed expenses are taken care of.
Knowing how much you have available for your variable expenses is an important tool that allows you to plan your purchases and prioritize.
- PAY YOURSELF FIRST
- TOTAL FIXED EXPENSES
- DEBT PAYMENTS
= MONEY AVAILABLE FOR EVERYDAY VARIABLE EXPENSES
Next thing on the agenda is plugging in all the everyday expenses that you have been tracking and writing down.
To compile this information you need to refer to your notes, receipts, bank statements, checkbooks, and credit card statements. So the more organized are your files and your tracking system, the quicker and painless would be this phase.
Flexible expenses include, but are not limited to: groceries, eating out, gas, clothing, entertainment, medical, gifts, and costs for pet care and supplies.
Example of Flexible Household Expenses
Make Your Budget Work for You
Now that you have your budget structured, it’s time to make it work for you.
The numbers in your budget represent a picture of your situation on a certain time, and it’s as accurate as the data that was entered. Your budget’s spreadsheets are a tool that needs analysis and planning to work for you.
Now you need to sit down with your spouse and possibly your older children, and discuss about the financial situation and ways to enhance it for the whole family.
Set Your Financial Goals
Setting Financial Goals
A very important part of making your budget work for you is to decide what you want to achieve. If money were no object, what would you and your family members like to be doing? Think about what is important for you, what are you trying to achieve in the next five-ten years?
Brainstorm with your family about family goals. At the brainstorming phase write down any goals or dreams that your family would like to achieve. Then estimate how much it would cost, and write a dollar amount next to it.
Now that you have all the things that you would love to purchase on a list, prioritize them by importance, and assign a realistic date by when you’d like to accomplish them. Next, group them under these categories:
Short-term goals can be accomplished within two years.
Mid-term goals can be accomplished within two to five years.
Long-term financial goals may take more than five years to accomplish
Your objective is to reach your goals without getting in debt; therefore you have to plan regular savings that are aimed specifically to each goal. Make sure you keep your goals realistic and flexible. Don’t set them too high, or it would just get frustrating.
Where to Look for Money
This is where the true benefits of keeping a budget come in. Examine each item on your budget and look for ways to minimize your expenses.
Cut unnecessary costs. Are you paying late fees, extra interests, or ATM fees?
Give up the unnecessary. We all pay for things that are great to have, but they are not really necessary. Is premium cable really that important to you? What if you compare it to saving for your top priority goal? Having in mind a specific goal helps a lot when it comes to changing some habits or making sacrifices in order to cut some corners. Look through your bills and see if you are paying for services that you don’t really use or need.
Reduce consumption. This is the major area where to find extra money. Look at your flexible expenses and plan for ways to reduce them. You can find a lot of inspiring articles and books about ways to save money on everyday expenses, such as groceries, energy, eating out, etc.
Sell the unwanted. Yard sales, garage sales, Craigslist, eBay, there are numerous ways to sell things that are just collecting dust in your house, but could be used by others.
Ask for what is yours. Have you landed money to friends that never paid you back? Contact them, maybe they are back on their feet and can pay you back, either in a lump sum, or with installments.
Increase your income. Look for new and creative ways to bring more money home. Consider asking for a raise, changing jobs, or getting an extra part-time job.
Make a Budget Plan and Stick to It
Once you have set your goals and your monthly savings, and cleared your bills from unnecessary costs, your budget tells you how much money is available for everyday expenses. Share this information with your spouse, discuss the goals with your family and make a financial plan.
Ensure that your family is active part of the plan. If you work as a team, everyone trying to accomplish the same goals, it’s going to be easier to change habits and adjust to a less expensive lifestyle.
Once you include your children in the process you may be amazed by their insight in the matter and how willing they are to cooperate.
Review your plan regularly, every month or so, and ensure that it is feasible and flexible.
Things happen in life. If unexpected expenses mess up your plan, you’ll have to make temporary adjustments to keep things on track while you get over the bump on the road.
© 2012 Robie Benve