This is a guest post from my amazing husband, Chris, on how to create a family budget …
Creating a family budget is not always as easy as it sounds. Trust me, I know from experience. I have read many personal finance authors, used dozens of budgeting software tools, and spent countless hours tweaking the Stanley Family budget, and if there is one thing that I have learned for sure, it is that family budgeting is an ever-evolving process that can be tedious at times. However, I have also learned that in the end, your diligent work will pay great rewards for you and your family.
An “ever-evolving process” is a good way to describe family budgeting. In the beginning, I searched everywhere for a “one-size fits all, forever” solution to family budgeting. I was not able to find that solution anywhere. Maybe it is out there somewhere, and if you find it please let me know, but I honestly do not think it exists. Once I was able to wrap my silly, perfectionistic brain around this one concept, I realized that there are a great deal of great tips, tricks, and tools out there to help create a great workable family budget.
I know, “a great workable family budget” doesn’t sound life changing, or even helpful , but experience has taught me that things like a “perfect family budget” do not exist in reality, only in theory. Don’t get me wrong; it is good to have a spending plan – a budget that encourages you to spend your money in ways that reflect larger family goals like saving for a house, retirement, a nice vacation, etc. However, if you try to create the perfect budget and you sell it to yourself and your family in that way, when the first little bump comes along, it may discourage you right out of the whole process. That is not helpful for anyone.
Below I have compiled all of my experience and knowledge about budgeting into three overarching steps. This is by no means meant to be a complete and comprehensive understanding of personal finances or family budgeting; however, I believe that if you follow these three steps you will be able to produce a great workable family budget that can help you achieve your family’s financial goals. Just for reference, my all-time favorite information source on family personal finances is Mr. Dave Ramsey (www.daveramsey.com). I recommend that you visit his site and maybe even read a few of his books like Total Money Makeover. His content has shaped much of my view on personal finances and family budgeting, and much of the advice below is rooted in his teachings.
Let’s get started…
1. Organize Your Finances – Before you can create a successful budget, you have to have a decent understanding of how much money you bring home, how much money you spend, and on what you spend your money. Honestly, this step will be the most difficult and time consuming out of the entire budgeting process, but trust me, your efforts will be greatly rewarded in the end.
There are a few different ways to approach the process of organizing your finances. You can break out the old spiral-bound notebook and pen, buy a software package like Quicken, or use free online software like Mint. Regardless of the tool that you decide to use, the process is the same. The primary goal of this step is to discover three important data items:
- How much money does your family consistently bring home each month? This figure is primarily salary and other consistent forms of compensation. If your monthly income is inconsistent such as with commission, than use a conservative estimation for an average month.
- How much money does your family spend on average for utilities (water, gas, electricity, etc.), fixed bills (tithe, mortgage, car payment, etc.), and necessities (groceries, household supplies, etc.)? This does not include funds for dining out, going to the movies, or other forms of entertainment. This number will help you plan how much money you will have leftover each month for discretionary spending.
- Design a list of income and expense categories that fit you and your family. For example, an expense category of groceries or dining-out, or an income category of salary or received-gifts. You should create categories that most accurately identify 90 – 95 percent of your expenses and income. After all, you will not be able to set spending goals on expenses that you cannot identify and track.
As I mentioned above, there are plenty of free paper or software tools available out there to help you with this process. Dave Ramsey has this budget worksheet available online from his Financial Peace University Program. Personally, I use software to organize my finances. Many financial institutions allow you to download your transactions right into your choice of software, and the software on the market today has the categorization feature built right into the product. This simplifies the process of categorizing your income and expenses, while giving you a much more accurate view of your finances than the traditional checkbook register.
If you are interested in a free software option let me recommend MINT. This online software tool is completely free and highly rated in the personal finance industry. If you are looking to purchase a system that you can install on your home PC, then I recommend Quicken. This is the product that I use, and I find that it gives me incredible insight into my personal finances, allowing me and my family to produce great budgets.
2. Make a Plan – Now that you know how much money you have to spend, how much money is already accounted for in fixed expenses, and what categories you are going to use to track your income and expenses; it is time to build a budget!
Designing a spending plan from here is more soul searching than it is fancy formulas and crazy finance theories. What are your family’s financial goals? These can be long term or short term goals. For example, a long term goal might be saving for a new car, while a short-term goal might be setting aside money for family birthdays this month. You and your family have to come to the table and develop a plan that addresses these family financial goals in order to create a successful budget.
For years I tried to create family budgets that took our yearly expenses for each category and divided them by twelve. I’m telling you from experience, this does not work. As Mr. Ramsey teaches, you should develop your budget every month for that specific month. This simple little principal changed my whole outlook on budgeting and is the single tip that allows our family budgets to be successful. It makes so much more sense, too. Some months you have family birthday’s or vacations to budget for, some months require more gas usage or involve less water used; each month is different and you should design a spending plan specific to that month’s needs. This can be an exciting opportunity for you and your family to to sit down, once a month, and discuss how to best steward the financial gifts God has given.
Another key point to remember that Mr. Ramsey also teaches is that budgeting is a zero sum game. That means that you have to account for every dollar in your budget: All income – All Expenses = Zero. This helps make sure that you always have a balanced budget and that you are not falling into debt. In our budget, we always specify expense amounts for the items identified by long or short term goals (such as savings or new clothes for the girls), and if we still have funds available after that, we either assign them to savings or to an “all other categories” expense category to be reallocated during the month based on unexpected expenses. This still follows Mr. Ramsey’s zero sum rule, but allows some flexibility in the budget for changes during the month; and honestly we have to make changes every month, but that’s fine. Again, this is a great workable budget, not a perfect budget. Leave yourself room for those adjustments. It will relieve your budget stress and help you actually stick to your budget.
3. Review and Adjust – Finally, at the end of each month, look over your budget numbers and your actuals. Learn from what worked and what didn’t work, and make those adjustments in the next month’s budget. One big lesson our family learned from the review process is that money was escaping our budget categorization process in the form of cash. You have to find a way to apply categorizations to your cash transactions as well, or you will never have an accurate picture of where your money is being spent and if you are staying within your spending plan. This little tip will greatly affect your spending picture for categories like “Snacks” and “Dining-out”, so take steps to record these transactions in your monthly spending report. You are not designing a perfect budget here, so don’t be discouraged with failures. Learn from them in the next month and strive to meet those financial goals.
I hope that you have found these 3 steps to be helpful pointers for you and your family as you endeavor to be better stewards of the financial resources that God has blessed you with. Budgeting is not always easy or fun, but the reward of being able to meet those financial goals is a reward well worth the difficult work. Do not get discouraged. Keep at it. Remember, you are creating a workable budget not a perfect budget.