What Is a Family Budget and How Do You Set One Up?

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A family budget is an accounting of your family’s income and outgoing expenses. A family budget should also include some type of savings so that you’re putting money aside for emergencies and long-term goals.

How To Create a Family Budget in 6 Steps  

Follow these six steps to create a monthly budget for your family.

1. Gather Your Income and Expenses  

Identify how much you earn and how much you spend. Using your after-tax income is easiest, so look at your pay stub or direct deposit amount.

Calculating Your Income

Here’s how to calculate your take-home pay:

• Paid twice a month: If you get paid twice a month, multiply your direct deposit amount by 2.
• Paid weekly: Multiply your take-home pay by 52, and then divide by 12.
• Paid biweekly: Multiply your take-home pay by 26, and then divide by 12.

Using this method, you’ll get an estimate of your monthly income so that you can start budgeting.

Breaking Down Your Expenses

Expenses are a little trickier. Here’s how you can start:

1. Gather up to six months of transactions: Download your last three to six months of transactions on your debit card and any credit cards you regularly use.
2. Essential vs. nonessential: Organize the transactions by whether they are necessary or optional, and within each of those, by a broad description.
3. Create categories: You may have a category for housing that includes your rent or mortgage, homeowner’s insurance, property taxes, utilities, maintenance and repair costs, groceries, clothing and entertainment, as examples.
4. Savings: Don’t forget to include a category for savings.
5. Add up the total and divide to find monthly expenses: Add up the expenses in each category and divide by the number of months of transactions you used to get your monthly expenditure in each category.

2. Evaluate Your Spending Habits  

Now that you have your income and expenses, take a look at what you’re spending your money on. You can leave your necessary expenses as they are, although there are some you may be able to trim later if you need to.

Look at the optional expenses — the dinners out, gifts, vacations, etc. You don’t need to slash anything yet — just know what these expenses are.

Once you know where your money’ is going’s headed, it’s time to choose a method that fits your lifestyle.

3. Choose a Budgeting Method  

There are several popular budgeting methods you can choose from to determine if you’re spending on the right things and are in a position to reach your financial goals. Remember, the “best” budgeting method is the one that you’ll actually use. If it’s too complicated, it probably won’t last more than a few months.

The 50/30/20 Budget

The 50/30/20 budget rule says you should spend:

• 50% of your income on needs: for all needs or essentials
• 30% on wants: these are your optional items
• 20% on savings: this goes toward money you’d like to save or use to reduce debt

Look at your spending in all categories and make adjustments so that it aligns with those percentages. Perhaps you can eliminate cable TV or streaming services, or switch to a more cost-effective cell phone plan, even though you consider those to be “needs.”

Zero-Based Budget

With the zero-based budget, you assign every dollar you earn to a category, so you end up with $0 at the end of the month. Include savings as a category as well and assign a dollar amount to that.

The Envelope System

Th envelope system method uses cash to divide your paycheck into envelopes with a specific category, such as groceries or gas. Once you’ve used all the funds in that envelope you can’t spend any more until your next paycheck. You can use budgeting apps or buckets in your savings account to do this too, if you don’t carry cash.

4. Set Realistic Goals  

By trying to change your lifestyle from living paycheck to paycheck to saving 30% of your salary, you are setting yourself up to fail.

If increasing your savings is your goal, start small by transferring $50 or $100 a month into your savings account.

As you find more place to reduce expenses, you can increase it. When you get a raise, increase your savings right away by half of the amount of the raise. You’ll still feel like you’re getting more money to spend but you’ll also be beefing up your savings.

5. Monitor Your Budget and Habits  

Budgeting is not a set-it-and-forget-it proposition. Review your spending at the end of each month to see if you’ve strayed from your budget and why.

6. Review and Adjust Your Budget Regularly  

Your budget will change over time as your income, expenses and priorities change. Whenever you have a change in circumstances, or if you’re having trouble sticking to the budget you set, review and adjust as necessary.

Tips for Cutting Back on Family Expenses   

Budgeting involves short-term sacrifices for long-term gains. Nearly every family has some expenses they can cut back on. Here are some things to try.

• Buy in bulk: Join a wholesale club to purchase items your family needs in large quantities for less. Make sure you know what you pay at other stores so you can be sure you’re saving, and watch out for the ‘deals you can’t pass up’ on things you have never tried or won’t use.
• Try a staycation: If you’re used to taking the family on expensive trips, try vacationing closer to home. You can still stay in a hotel and visit local attractions and landmarks. But, by eliminating the cost to get to that vacation spot, this can mean big savings.
• Do it yourself: If you pay for lawn care or house cleaning, consider whether or not you can do these yourself. Don’t make yourself miserable doing something you hate or aren’t good at, but if you can avoid hiring someone, you’ll save some money.

Get Better Financial Health With Family Budgeting

Budgeting shouldn’t be a dirty little secret. Everyone in the family should be on board so they can understand when things they want don’t fit in the budget.

When children participate and have a voice, they are more likely to cooperate. They’ll also learn good financial habits for the future.

• Children can be involved in an age-appropriate way.
• Younger children can help compare prices at the supermarket.
• Older children can be involved in vacation planning or choosing a budget-friendly restaurant.

Family budgeting involves some effort and some sacrifice, but it’s worth it. Taking the time to set up a budget that you can adhere to will pay lifelong dividends.

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