Creating a family budget can be intimidating, to say the least. Some people may think they do not need a family budget because they do not make great sums of money or because they watch their banking activity online, but budgets are much more than that.
Making a formal family budget can help track your spending and what is costing you the most. This information is necessary to be able to make informed decisions about where your money should be going and what sort of spending leeway you have in each spending category. When you start to manage your money smarter, you will be amazed to see how much more money you can save or invest in a relatively short period of time. Good family budgeting can help you meet your financial goals as efficiently and quickly as possible.
How can you make a realistic family budget? It is not important if you are single or married, childless or the parent of five, rich or poor, as your household can and should make a budget. Budgets are the best way to maximize the value of every dollar earned. You start the process by gathering all the necessary financial information and choosing your budget style. Once you have a clear picture of your financial life, you will need to start parsing through the details to figure out where you are spending all your money. At this point, a little self-reflection on what your economic goals are for the next couple years or even longer will be helpful for spelling out your short-term financial goals. Once you know what you have and what you want, the last step is to design the plan for getting it. This final bit usually involves some number crunching and automation.
Whether your financial goals are to save for college, early retirement, your mortgage or anything else, smarter money management like this is the first step towards that aim. Keep reading for more about the five steps you can follow to create a family budget and finally meet your financial goals.
Get a Clear Picture of Your Financial Life
There is no way to organize your budget without knowing how much money you have or how much you are spending. As such, the first step towards making a family budget is to gather all relevant financial information, which includes paystubs, receipts from big purchases, banking activity printouts, credit card statements or other documentation concerning your finances. Once compiled, you will need to divide the information into incoming and outgoing sums and add them up. Choose a time period to base your calculations on, maybe per week or per month, and add up how much you earn in total during the time period to compare with how much you spent.
It is very important that these incoming and outgoing sums are as accurate as possible. When uncertain, it is better to err on the side of higher estimates for spending and lower expectations for earning. This buffer will either help you when you need it or, more ideally, it will result in a bit of extra cash at the end of the year. Either way, you will be happy to have it. If you are wondering what is the best way to compile all this data, then there are several options online or by paper that you can choose from.
See Where Your Money is Going
It would be a good idea at this point to start thinking about which method you prefer so you can begin keeping track in the same way. For example, if you pay your bills mostly online and would like to build your budget on the computer as well, then you should compile this information in a digital program that you can continue to record your information in. There are several free money-tracking programs available online, many that provide an array of useful tools for understanding how you are spending your money. For traditionalists, the tried and true method of plugging numbers into an Excel or GoogleDocs spreadsheet is as functional and satisfying as ever. If you prefer mailing in checks or using other paper-based methods, then you may want to start keeping track of your income and expenses in a written notebook that you keep with your receipts, checks, etc.
Once you have chosen how you will examine your data and completed the necessary total calculations, you will want to start dividing your expenses into different categories such as housing, utilities, eating out, clothing/shoes, etc. Whatever you spend any significant amount on probably merits a category. In many online budget programs, the categorization of your expenses can be done automatically. With all of this information at your fingertips, you can really start to understand your family’s financial life.
Choose Your Financial Goals and Prioritize Your Spending Habits
Now that you see where your money is being spent, would you say your spending matches up with your priorities? Before having a working budget, most people find upon closer inspection that their spending habits do not match up to their priorities. Until the numbers are laid out in front of them, it is hard for many people to realize that having tacos every couple weeks ended up costing them $3,000 last year. This is the importance of creating a family budget.
Now that you are armed with the facts of your spending habits, it is time to decide where you would actually like your money to be going. To do this, you will need to have an idea of what your financial goals are for at least the short term although ideally also the long term. Financial goals can take many different shapes and sizes, although all should be realistic and reasonably within your means. For some, the aim may be to cut back on costs and save 10 percent of their salary every month, while for others the goal may be to make higher credit card payments to get out of debt sooner. Whatever the case, budgeting can help you be much more effective at meeting those goals as quickly as possible.
Choose Your Budgeting Strategy and Create Your Plan
Once you know what you want to achieve, it is time to figure out a way to make it happen. Beyond your necessities, that is housing, utilities, transportation, credit cards, education loan payments and medical insurance, how much is left? This is the amount that you are really working with. There are multiple ways you can decide to divide up this remaining discretionary spending sum. Some recommend dividing it into three primary “buckets,” whereby you put money towards your savings and debt first, your dreams and activities second and your financial independence last.
Another popular strategy divides expenses into three categories according to the 50/20/30 rule, whereby you spend 50 percent of your budget on living necessities, 20 percent on your financial freedom goals and the final 30 percent on flexible spending that includes everything you want but may not need. In general, if you are not putting anything into savings or into paying your high-interest debt, then those should take up a majority of your discretionary funds.
Once you know what you have and what you want to work towards, set things up to make it as easy as possible to reach your goals. If you make online payments, then automate as many of them as possible so you never miss a payment. Consider consolidating all of your e-bills in one place to make payment even easier. You can look into changing bill due dates to limit the hassle of mailing out payments throughout the entire month if you pay by mail. You can set up a withdrawal and deposit order to automatically take out a certain sum from your checking account and place it into a savings account dedicated to one of your buckets or goals. Make your budget as simple as possible to increase the likelihood that you will follow through with your priorities and goals. Learn easy tips for saving money every day here if your need to tighten you household’s budget.