There are few things in life that can be so basic and yet make such big impact on your life. A family budget is one of those things. A simple family budget can not only improve your family finances, it can improve your marriage and family life as well. A budget is a framework that allows you to save, spend and give guilt free. It is also a tool that builds communication between spouses. In this post I hope to outline the steps needed to create your first family budget.
1. Track Your Spending:
The first step in creating your budget is to track your spending. Before you can direct your money and use it with purpose, you have to know where it is going. There are a few ways that you can track your spending.
a. Old Fashion Pen and Paper- that’s right the simplest way to track your spending is to have the good old pen and paper in your pocket and write down every dollar that you spend. You buy a coffee…write it down, you pay the electricity bill…make a note. You get the point. The key is to make sure that you write down every single time you spend money. Another great way to do this is to track it in your notes app on your smart phone!
b. Getting Technical- another popular way (and how I did it for my first few years) is to set aside 15-20 minutes each week and go back through your debit and credit card transactions online and sort them by your spending categories (more on this in a bit). This is great if you’re like me and use a debit or credit card for every transaction. You can login to your account and download an excel spreadsheet of all your transactions from the previous week.
c. High Tech- The simplest way to track your spending is to use an online platform like Mint.com. Mint is a free online personal finance site that allows you to connect your debit and credit cards and it will breakdown all of your transactions by categories. This is really easy but sometimes doesn’t allow you to get a good feel for where your money is going.
It may be better to use a combination of these three as you learn to track your spending. Start by writing down every transaction the first week, then download all your transactions the next week and then by week three start to use a service like Mint.com.
2. Identify Your Income
Now that you know where your money is going you are ready to start building your budget. The first step is to write at the top of a piece of paper or excel file the amount of money that is deposited into your bank account each month. If you are a two income household then put the combined number at the top. Keep in mind that this is not just how much you make each year divided by 12. Each time you are paid money comes out before it gets to your bank account. Tax withholdings come out, insurance premiums come out and hopefully retirement savings come. After all of these “withholdings” are taken out you are left with your take home income and this is the amount that we have to work with in your monthly budget.
3. Identify Your Three Buckets of Expenses
Now that we know how much money comes into the household each month we need to look at where this money is going. Right under the take home income number you will want to draw three boxes. On top of each box write: Fixed Expenses, Variable Expenses and Goal Expenses. All of the expenses that you identified while tracking your spending will fit into one of these three boxes.
a. Fixed Expenses: Fixed expenses are expenses that don’t change from month to month or if there do it is minimal. They are also expenses that you are committed to or don’t have the options of changing in the short term. Examples of fixed expenses are: mortgage/rent, utilities, insurance, cell phone, gym, minimum debt payments for credit cards or student loans, etc. Write out in the first box a list of all the fixed expenses that you identified in your spending. Don’t worry about putting dollar amounts next to them just list them out for now.
b. Variable Expenses: These are expense that you have more control over from month to month. The decisions that you make can affect the amounts that these items cost you each month. Examples of variable expenses are eating out, groceries, transportation, entertainment, gifts, charitable giving, vacations, etc. Write out in the second box a list of all the variable expenses that you identified in your spending.
c. Goals: These expenses are tied to your goals. Each month you will want to allocate some portion of your income to achieving your goals. Goals could be paying down debt, saving for vacation, saving for a down payment on a house, etc. Write out in the last box a list of all the expenses related to your financial goals. (Haven’t set financial goals yet? Click here to read up on how to set financial goals.)
4. Create An Ideal Month
You now know how much money you take home each month and all the categories that you spend money on each month. It is now time to pull it all together. Take out the list of expenses that you identified when tracking your spending. Add up all the expenses for each category. For example, add up all the money you spent on groceries. Assign that number to the groceries category. This will serve as a starting point for creating a goal or budget for how much you plan to spend on groceries each month. If the number looks high or low for some reason, adjust appropriately. Keep in mind that these number will change as you get better at budgeting so don’t get too bogged down in the details. Now repeat this for each category of expenses. In the end you should have a number next to each category.
You now will want to add all of the expenses for each bucket and at the bottom of the bucket write the total.
Now total all three expense budgets at the bottom. This number is your total budgeted expense for the month. You want this number to be less than your total take home income. If the number is more than your take home income you will want to back through (most probably the variable or goal buckets) and reduce it so that your take home is at least equal to your total expenses.
Congratulations you have just created your first budget!
5. Keep Tracking
Now that you have your budget you will want to stick to it each month. This will prevent you from going into debt and help you to achieve your financial goals. Each month you can sit down and compare how much you actually spent each month with how much you planned to spend each month. If you notice that each month you are over spending or under spending on a certain category then you may want to adjust the planned amount. Just keep in mind that you want the expenses to always be less than the income.