Managing a household involves providing for every family member’s needs, paying for unexpected expenses, and saving for the future. This is where creating a family budget can help.
A carefully planned budget allows you to manage your income and distribute it properly for a more satisfactory living. As a result, your whole family will feel less stressed and more secured about their future.
Whether you’re in a financial bind or looking for ways to save more, having a monthly budget can help you live within your means.
Here’s everything you need to know about family budgets, their benefits, and how to create one that works for you.
What is a Family Budget?
A family budget refers to a plan for the money that enters and goes out of the household. It includes the expenses and income for a specified period, whether monthly or yearly.
Family budgets show how the combined monthly income is distributed over different areas of spending. These include food and utilities, savings, investments, loans or debt payments, and other expenses.
What Are the Benefits of Creating a Monthly Family Budget?
Creating a family budget allows you to allocate your income in a way that benefits every member of the family. It presents an opportunity to achieve financial security and freedom.
While many individuals spend their money unintentionally, a budget can empower you and your family. It is a way to make money work for you. Here are the advantages of having a monthly budget for the whole family:
Set Financial Goals
Creating and implementing a monthly budget enables families to reach their financial goals. With the help of budgeting, you can determine the amount of money that can be used for saving or investing.
Families can allocate their income every month for different goals, whether it’s for a new house, business capital, college education, or retirement. This ensures that the money being saved will be used for its purpose, instead of wasting it on things that don’t matter.
If there’s an increase in income due to a pay raise or career change, the allocated money for your financial goals can also significantly increase.
Tracks and Manages Spending
A well-planned family budget can serve as a roadmap, so you can see where your money is going every month. A family budget helps you become more intentional in your money spending and saving habits.
Tracking and managing your spending allows you to have control over your hard-earned income and not the other way around.
You can determine which expenses are wasteful and can be reduced, such as eating out, clothes shopping, or entertainment. This is especially beneficial for a family that may be struggling to make ends meet.
Eliminating any excessive or unnecessary spending helps add extra cash for necessities, bills, or debt payments by the end of each month. Then, you won’t have to stress over adjusting or stretching your income to make up for the lack of funds.
Helps Eliminate Debt
Creating a family budget is a helpful way to get rid of any debt. You can pay off your credit card debts by setting aside a certain amount of money, which is more than the minimum monthly payment required.
By limiting the use of credit cards, the whole family can also reduce wasteful spending. The money saved can serve as a source of supplemental funds, which can be used for debts.
If there are additional savings, you can also build an emergency fund for your family.
This financial safety net helps you pay for any unexpected expenses in cash without using credit.
Promotes Transparency
Through budgeting, you can communicate how money should be used within your family. This encourages and promotes transparency with your spouse and other family members.
An open communication about money within the family shows that it should not be regarded as a taboo subject. Having meaningful family conversations regarding money is crucial to everyone’s financial wellness.
When everyone is on the same page regarding money, it allows the family to work together towards achieving common financial goals. Being transparent with the family budget helps prevent any conflict while settling personal differences on the spending of money.
As a result, the family will have better teamwork when it comes to solving potential financial issues. Everyone can be prepared and make necessary adjustments if a problem occurs.
Sets a Positive Example for Children
Involving the entire family in the process of budgeting provides a good example to your children. It will guide their habits towards money, encouraging them to spend and save wisely.
No matter how young they are, it is never too early to start educating your children about financial responsibility. Help your kids come up with simple yet impactful ways to cut expenses at home.
For example, they could turn off the lights when they leave the room to reduce the energy bills.
Show your kids how every small effort from all family members can positively affect the household at the end of every month. This helps them become more motivated to keep up with good habits.
Step-by-Step Guide on How to Create a Family Budget
Now that you’ve learned the benefits of a monthly family budget, here are the following steps to creating a budget that can be easily managed and maintained.
1. Set a Clear Goal
Setting a financial goal is vital to a family budget. Start by asking yourself what you intend to get from creating this budget. Below are some common goals for families:
- Making payments on time at the end of each month
- Getting out of debt
- Saving up to buy a new house or car
- Having an emergency fund if you need it
- Improving credit score
Once you have decided what your goals are, you can begin taking steps to achieve them.
2. Select a Budgeting Tool or Method
Next, you need to choose a budgeting system that will help you conveniently track your income and expenses every month. There are many methods and tools available that can vary depending on your goals.
When selecting one, make sure that it is accessible and easy to use while creating monthly family budgets. If you prefer the traditional pen-and-paper method, you can follow the 50/30/20 rule. This budgeting method divides your income into three categories:
- 50% for essentials, such as food, utilities, housing, transportation, child care, etc.
- 30% for wants and miscellaneous expenses, such as entertainment, shopping, or travel
- 20% for savings, such as emergency or retirement funds and debt repayments
There are other budgeting methods as well, such as 60/30/10 (which is very similar, just with more money devoted to essentials), and even 30/30/30/10, which splits up your income into housing expenses, utilities, financial goals, and wants (respectively).
There is no one percentage rule that works better than the others – it simply gives you a guideline to live within your means. You can always adjust it to fit your lifestyle.
The main point of having a rule like this is that it keeps you consistent, which is important to make budgeting work.
3. Determine Your Monthly Earnings
After choosing which budgeting method to use, write down the amount of money that you and your spouse will get for the month. You can both review your bank statements or payslips to get the big picture of your combined monthly income.
If you have irregular earnings, set the lowest estimate of the usual amount you make. You can make adjustments later on if you earn more.
The reason for this is that if you overestimate the amount you’ll make in a month, you’ll end up going overbudget without meaning to. It’s much better to have extra money than to suddenly realize you don’t have enough.
Of course, make sure to take into account not only your regular job(s), but also any side hustles you’re doing. This might be a little more difficult to determine if you don’t do it often, but again, set the lowest estimate. Look back at your history and figure out, “What do I make from this on average each month?”
4. Categorize Your Expenses
List all your expenses to determine exactly where your money goes every month. Checking your bills, bank accounts, or receipts will help give you an estimate.
You can get a clear view of your monthly spending by dividing every expense into these categories:
- Necessities: groceries, rent, electricity bill, etc.
- Personal spending: eating out, gifts, etc.
- Debts: mortgage, credit card, car loans, medical expenses, student loans, etc.
5. Start Calculating
If you prefer creating a family budget manually, gather all your financial information into one place. Begin the calculation by subtracting the income from the expenses.
It is best to budget any leftover funds from your income, putting them in your savings account or monthly debt repayments. This ensures that you won’t use the money mindlessly on random purchases.
Keep in mind that you don’t have to do this manually, though – unless that’s what you prefer (some people do). There are plenty of free budgeting apps out there, it’s just a matter of finding the one that works best for you.
6. Reduce Unnecessary Spending
A great way to maximize your family budget is by evaluating and decreasing any unnecessary spending. Otherwise, you’ll end up having less money for the things you need.
This will also give your household finances some breathing room. You don’t have to worry about where to get extra money if unexpected things were to happen.
Below are some tips to reduce your family’s spending:
- Meal prep and set a meal calendar. It’s much easier to order takeout when you don’t know what to eat for dinner.
- If you are going somewhere nearby, consider walking, biking, or taking public transit. As a bonus, you’ll get some exercise along the way.
- Use coupons or take advantage of sales – just don’t get baited into taking advantage of a sale or using a coupon for something you don’t need. It’s not a bargain if you weren’t going to buy it anyway. It's just an unnecessary expense.
- Shop around for insurance and make sure the plans you have are actually a good deal.
- Work on giving up unhealthy habits such as drinking, smoking, or, yes, compulsively eating chocolate.
7. Do a Monthly Review of Family Budget
It’s important to keep in mind that budgeting is not a one-and-done thing. You don’t create the golden standard for budgets and use that the rest of your life.
No, life changes, and so will your budget. It might be a small change like stopping your side hustle, or it might be a larger change like getting a new job.
But either way, updating it every month will help you out.
Not to mention that it allows you to keep track of your financial goals. It might seem a little tedious to keep up with it, but it can actually be a major source of encouragement.
If you planned to pay off your credit card debt, for example, you might find out that you’re paying at least your statement balance every month. That’s something to celebrate.
Final Thoughts
A family budget is an important financial tool that helps determine how a household can use and maximize its resources. It gives you an idea regarding the amount of money you earn versus the amount you spend.
Creating a monthly family budget requires time, teamwork, and maintenance. But later on, you will find that every effort, no matter how small, is worth it.
To ensure the success of your financial goals, you need the right partner. That’s why our team of qualified advisors at 121 Financial Credit Union are ready to assist you.
Contact us today to learn more about our programs and services.