How to prepare a family budget: Step by Step guide

The key to a successful budget is sticking to the fundamental rule of spending less than you earn. By creating a family budget you are bringing your spending habits into focus, that also means that there will be some winners and some losers.

Especially if you are running a large family, there will be disappointments (especially kids) and negotiations that you can expect, but at the end of the day, it’s a teamwork.

But having a budget places you in charge of your money and provides required finance for your goals.

If you are feeling overwhelmed to prepare a family budget, then this article will help you by taking through step by step process of preparing a family budget.

Money Management Habits

A study was conducted by the European Journal of Social Psychology, 96 volunteers chose an eating, drinking or activity behaviour to carry out daily in the same context (for example ‘after breakfast’) for 12 weeks. It took 66 days for individuals to form or change a habit.

So stick to your Budget at least 3 months to make it a financial habit.

Budgeting Basics

While preparing a family budget, you are also setting the boundaries for your spending habit. Here you decide how much of your money will be allocated to a particular category or expense.

Creating a family budget is a one-off time-consuming activity, it is not easy to prepare a family budget, its boring, brain-numbing and tiring, but can be achieved through persistence.

Sticking through a budget is extremely difficult, this is where you will face challenges in negotiating with your wants and needs, dealing with the emotions of your family members. I don’t want to discourage you with a scary picture but I want you to stay strong in the face of pain, fear or grief.

This is not a one-person job in a family, it is a family commitment, you need the support of all your family members.

What is a family budget

Wikipedia defines the family budget as ” a financial plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget. “

This is exactly what a family budget is, a digital or a paper statement that will define the boundaries of spending money on needs and saving money on wants, showing the distribution of the family income over various expenses.

What is not a family budget

A family budget doesn’t show you a hidden treasure to solve your money problems, it is not a quick fix during stressful times, but with commitment, it will slowly and eventually move you out of financial crunch and towards balanced financial freedom and prosperity.

Why is it important

Having a family budget allows you to come up with a plan for saving and spending, a plan that your family has committed to follow. This will ensure that you always have enough funds for the needs, it empowers you to spend money on the most important things in your life.

Please share the 5 steps for a family budget story below

Step #1: Set Your Finance Goals For The Family

It’s hard to complete the family budget, but even harder to follow through. Having a written Financial Goal will propel and help you to maintain the momentum during tough times.

Sometimes Family Budget gets overwhelming, having a financial goal in the centre, recoups, re-energises and provides a rational reason for the chaos.

Your Family Finance Goal needs to be SMART. SMART is an acronym for the 5 elements of specific, measurable, achievable, relevant, and time-based goals.

When you define a Goal, the aim needs to go beyond the realm of fuzzy goal-setting to crystal clear goal.

Specific

Goals need to be crystal clear; I want to buy a nice car next year is an example of a fuzzy goal.

You can redefine this goal, by knowing what car you want to buy and by when you want to buy.

A specific goal will be

“I want to save $12,000 in two years to buy a car ”

By having a specific goal, now you know how much it costs, how long it takes to save that money and how much you need to save.

Measurable

What you can’t measure you can’t manage

Split specific goal into a measurable milestone. If your goal is to save $12,000 to buy a car in two years, then a measurable milestone will be to save $500 per month.

Frequently checking the progress of your goal can be frustrating, progress appears to be at the snail phase.

Achievable, Realistic and Time-oriented

Goals need to be achievable, aiming to save more than 30% of your income while you are currently saving 10% is neither achievable nor realistic.

An achievable and Realistic goal will be within your budget, lifestyle and habits, or you can aim for a goal that doesn’t ask for significant sacrifice in the first month.

Sometimes a goal can be unrealistic, like aiming to increase savings from 10% to 30%, but you can plan and work towards the outcome over a period of time.

Having a time frame for the goal helps you to track the progress. Time-oriented goals will discourage you from procrastinating.

Step #2: Understand Your Money

Creating a budget is about figuring out where you are spending, and how you can be efficient with your money and realise your dreams.

You could either be drowning in debt or having a strong financial shape, no matter what your financial situation is right now, preparing the family budget is your starting point.

Know the Big Picture

There are many facets of your financial picture, not just income (paychecks) and expense(bills, loans etc), even though they form the roots of your financial situation.

It is good to know what your net worth (Assets- Liabilities) is, but let’s focus on it once we prepare the family budget.

Focus on looking at income and expenses.

Knowing Income and Expenses

When capturing monthly income, only consider take-home income. After-tax income is the only income that you can spend or save beyond your superannuation or retirement fund.

Your source of income includes not just salary (after taxes), but also include sales commissions, rental income, government benefits, pensions, child support, dividends and other income.

How to calculate Monthly Income?

There are many time frames that an employee can get their pay- it could be Weekly, Bi-Weekly, Monthly and irregular. Irrespective of the timeframe, you can derive your monthly income by multiplying it with weeks and dividing by 12 months.

For instance, if your income is Bi-weekly, then ($income * 26)/12 will give you the monthly income.

Weekly Income	($ Income * 52) / 12
Bi-Weekly Income	($ Income * 26) / 12
Monthly	Nothing to do
Irregular Income	Take the last 3 months of income and divide by 3 or Income from the last year and divide by 12

Record your expense

Based on your bills and bank statements record all your expenses for the past 12 months. Categorise this data as Utilities, Groceries/Food, Rent/Mortgage, entertainment, Clothing, Insurance, Medical/Healthcare etc.

It is normal that your income and expenses don’t match, there will be gaps, miscellaneous expenses, expenses that you have never tracked that cause this imbalance.

Don’t sweat on tallying income and expenses to Zero base- as long as you can record big expenses, recurring expenses, and tracked expenses it should put you in a good starting point.

In the past, you may not have tracked your expenses, but this is the habit that you need to build going forward.

Step #3: Select Your Budgeting Method

There are a lot of ways that you can prepare your budget, not one method suits all. Selecting a budgeting method depends on many factors like your income and expense, your age, family lifestyle, financial goals, risk appetite etc.

#1: The 50–30–20 Budget Method

The 50/30/20 rule was first mentioned by Elizabeth Ann Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan.” and it has become particularly popular since then.

If you decide to implement your budget using this rule, then you need to allocate 50% of your income to your Needs, 30% to your wants and 20% should be saved.

Use the 50/30/20 onsite budgeting calculator.

Whom does this method fit?

If your family financial situation is that, you are in a lot of debt or having difficulty to pay bills, living paycheck to paycheck or have zero savings then this is an ideal methodology to use for your budget.

Drawbacks

This method doesn’t encourage you to have an investment strategy. Also, here I have written an in-depth analysis detailing why you shouldn’t implement a 50/30/20 budgeting rule of thumb as is.

#2: The 80–20 Budget

This is also called as Pay yourself first, this is where you take 20% of your after-tax pay and put in savings and the rest goes to the big-spending pile. You can choose to split the 20% among your savings, investments, retirement funds and emergency funds etc.

Use onsite Pay Yourself First Calculator.

Whom does this method fit?

If you are in a financial situation where there is a lot of debt, and also you want a simple and quick solution to implement a budget in your family, then this is ideal.

Drawbacks

This method provides, one universal blanket rule to save another, giving no opportunity to cut down on costs.

#3: The Zero-Sum Budget

Zero-sum budget is a strategy that forces you to spend every dollar income – that is, you need to give every dollar that you earn a Job. In this method, savings and investments are also treated as expenses.

If you are earning $5000 per month, then you will allocate a certain amount to each category, bills, rent, savings, investment etc. If there is any amount left at the end of the month, it is also given a job.

Category	Amount
Rent	$1000
Health Insurance	$200
Food/Groceries budget allocation	$400
Car Loan	$250
Netflix/NBN/Mobile	$200
Petrol	$200
Utilities	$400
Clothes	$500
Entertainment	$300
Miscellaneous	$200
Dining Out	$600
Saving	$750
Total	$5000

Whom does this method fit?

If you are in a financial situation where there is a lot of debt, and also you want a simple and quick solution to implement a budget in your family, then this is ideal.

Drawbacks

One universal blanket rule to save this, giving you no opportunity to cut down on expenses as there is no clarity of how much you are spending in each category.

In this family budgeting method, you need to budget for everything and need to overestimate variable expenses. If you are short on money for any expenses then you have to borrow from other category making it a ripple effect, and as this is a zero-sum budget there will not be any spare money lying around.

If you are left with a spare change due to overestimating, then you will give it a job at the end of the month by saving or investing.

#4: The “Debt Diet” Budget

Oprah’s “Debt Diet,” was created in the year 2006 with advice from top financial experts David Bach, Glinda Bridgforth, and Jean Chatzky. This is much more granular than a 50-30-20 rule of budgeting as it tracks more money.

Just like the 50-30-20 rule of thumb, in this method, your budget allocation is based on the percentage of after-tax income.

This allocation is based on these 5 categories (use Oprah’s Debt Diet Calculator).

1. Housing: 35 per cent:

All the expenses right from rent or mortgage payment to utilities, insurance, and repairs, that are related to your home.

2. Transportation: 15 per cent:

In this category, any expense related to your transportation, car insurance, petrol, maintenance, Train/tram tickets, toll etc.

3. Other living expenses: 25 percent:

This category is a catch-all bucket, if an expense doesn’t fit in Housing or transportation, then it falls in this category. All expenses, including massage, grooming, pet, dining out, etc., come into this category.

4. Savings: 10 percent.

Saving 10 per cent might seem like a small amount, but as part of the compulsory superannuation plan, you are already saving an additional 9 to 13 per cent. This is the most important area, your focus should be to increase this amount gradually.

5. Debt repayment: 15 per cent.

This category covers the loan amount that you need to repay, this doesn’t include the minimum loan amount as this should be covered in the first two categories.

Also in here you only consider loans like car loan, credit card debt, and personal loan etc.

You can decide to repay the 15 per cent amount equally between all your loans or high-interest loan first or pay off the least loan account first for closure. It’s ideal to pay these types of loans first and your house mortgage last.

Whom does this method fit?

This is a debt focused budget, this is aimed at attacking your avalanche of debt. If your debt is piling up then this way of budgeting helps you.

Drawbacks

Other living expense is too large for comfort, where you can throw everything from healthy financial habits to unhealthy financial habits and anything in between. This category will spoil you to mask expenses, not allowing positive feedback for a better financial future.

#5: Dave Ramsey’s Cash Envelope

As created by Dave Ramsey, “the envelope system is a way to track exactly how much money you have in each budget category for the month by keeping your cash tucked away in envelopes. At the end of the month, you can see how much cash is left by taking a quick peek in your envelope.”

It is as simple as defining all your categories and decides how much you want to spend in each category. For each category create an envelope and withdraw cash from the bank to place it in the envelope.

At the end of the month, you look into the envelope to know how much money is left in each category.

This way of budgeting discourages you from spending more than allocated budgeted amount.

Whom does this method fit?

This method of budget helps you to control the amount you are spending on each category, if you have difficulty in sticking to your budget, then this is something that will help you.

Drawbacks

You are now purely based on spending cash, this may not be ideal in all circumstances, people have found it difficult to follow this system during Coronavirus pandemic.

Another challenge that you need to be cautious of is if a burglary happens in your home, you are prone to lose a large chunk of cash apart from household equipment and jewellery.

Since you are paying all your expense with cash, then you will end up losing bank interest that you could potentially earn and any rewards that you were supposed to gain on your credit cards.

#6: The 70-10-10-10 Budgeting Method (Recommended)

This might sound similar to other budgeting methods like 50-30-20 with percentage differences. Yes, this is indeed just a percentage variance, but this methodology is much realistic and much better (in my view).

The 70-10-10-10 budgeting methodology has been popularised by late Jim Rohn. In this rule, you allocate 70% of your after-tax income to living expenses like bills, loan repayments etc.

You can use the 70-10-10-10 Budgeting Calculator onsite

Next 10% will be used for passive investing, this is the amount that you would invest for the long term. The investment could be properties or any assets that will take a long time for profits to be realised or investments that can’t be cashed in a day or two.

Next 10% will be used for active investing, this could be investing in shares, saving into a bank etc, where positions can be cashed easily.

The last 10% will be given to charity or a community for a cause that you believe in to make the world a better place. By giving a certain amount of money locally you are reaping the benefits for yourself and you can also see your money at work.

Whom does this method fit?

I like this budgeting method as it’s more balanced than other methods above. Apart from focusing on saving, this budgeting method allocates your money to saving, investing and charity. If you are in debt, ideally you want to use the 10% charity in paying off your debt.

Drawbacks

No matter how much I like there are still some challenges with this budget, if your current expenses are 85% then you need to come up a creative way without upsetting family members to increase your savings.

Some experts argue that 10% of savings for retirement might not be enough.

Which Budgeting Method Should You Choose

As you can see that there is no one method without drawbacks, all the methods have their pros and cons. There is no one size that fits all and you don’t have to follow one rule religiously.

When you select a budget you need to remember your strengths and should be aware of your weakness. If you are someone who is frequently spending more than the budgeted amount, then Dave Ramsey’s Cash Envelop is the method that suits you.

You don’t have to feel compelled to stick to one budgeting method or to even the percentages within a budget method. Be creative to mix and match or segment the budgeting percentages the way it fits your lifestyle and financial situation.

For instance, you can choose to change the 70-10-10-10 budgeting method to the 75-10-10-5 method, where for the 75% part you can use Dave Ramsey’s Cash envelop method.

Step #4: Putting A Family Budget Together

Now that you have selected a method to prepare your budget, it’s time to put everything together.

To start preparing your family budget, create a folder “budget”, collect all your paper bills and place all your digital bills in the folder.

Gather all your financial statements for the past 12 months. As basic as it may sound, the strength of your budget is determined by how complete these statements are.

Capturing of these details can be done either manually (paper) or using the software. If you decide to do this manually there are many free budgeting printables available, I recommend using free instead of paying for budgeting printables, especially if you are starting.

There are many budgeting apps/software, but the simplest and most effective way is to do it on excel.

Collecting all the bills for expenses is the simplest task, skimming through the numbers might be daunting and feels like an impossible task. To ease into this process, sort the bills by month and capture 3 months at a time.

Concentrate on your income, determine different sources of income. Your income is not just a paycheck, it could also be the rental income, government grant, job seeker income etc.

There are two stages in this process,

1. First, from your previous year’s spending understand how much you have spent for each category (utilities, house, transport etc) over the past year.
2. Second, you need to come up with a limit for each category that you want to spend going forward. If you make the allocation quite aggressively, then it might not work, a balanced realistic approach is recommended.

If you have selected to follow the 70-10-10-10 budgeting method, then your after-tax allocation shouldn’t exceed 70% of income.

During your initial allocation, if it’s coming to 90%, then let it be- in the first month, aim to track, follow and maintain the budget. The next month budget you should aim to reduce this allocation to 85% per cent.

Step #5: Tracking and Maintaining

Tracking is one of the key factors in making a successful budget. The amount you are spending might look small on a day to day basis, but when all added up monthly, it will either break or make your budget.

It’s better to record your spending daily, if not daily at least a weekly basis, to give you an idea of how much is remaining in the budget to stop you from overspending.

If creating a budget is a hard part, then tracking and maintaining is the second hardest part that will test your grit.

You can track it using a simple tool like a small note and pen or a sophisticated app that links to your bank account.

I recommend tracking your expenses in the old way of pen and notebook, there is something about writing as it wires up your brain and makes you remember longer.

No matter how you track it, you need to do it consistently to have a successful family budget.

You need to remember that your family budget is a living document(s) that will evolve as your family needs and financial goals change. You are expected to frequently change, make adjustments, tweak numbers and allow exceptions as needed and to obtain your financial goal.

All the best!