How to Budget as a Family

Budgeting is an incredibly important exercise. A budget is like a strategic plan. It is what you expect to happen. Budgeting helps you get clear on what is coming in and what is going out.

Most people think they know where their money goes, but I guarantee that most don’t. Prior to tracking our expenses, we budgeted $700 a month on groceries. This seemed like a lot for two people. I was shocked to find out we were spending over $1000 per month on average!

Changes happen all the time in the course of family life. The costs of a baby in year one are not the same in year two. You should be able to adjust your budget as income and expenses change. I update ours twice a year on average.

So how do you budget?

The basic idea behind budgeting is listing your income and expenses and ensuring your budget is balanced. This means that when you subtract your expenses from your income, it should be zero or a positive number.

Balanced budget formula: Income – Expenses = 0 or a positive number

If it the number is negative, you will have to adjust your expenses to bring your budget into balance.

The other aspect to look at is whether your income and expenses match your values and goals.

Here is the basic step by step approach to making a budget.

Step 1: Use a budget template or make your own

You will need something to record your income and expenses, and do the math. You can do this with a pen and paper, your phone or a computer program like Excel.  

My family has used an Excel spreadsheet for years. I like Excel because you can easily change it when income and expenses change, or if you want to see the impact of what projected changes might make on your budget (for example, can you afford a new car?).

We put together this family budget template so you can go straight to data entry.

Other options are to use an app like YNAB (You Need a Budget) or Mint.

Step 2: List your sources of income

Pull out your pay stubs or your direct deposit info and list your monthly after-tax income. I suggest using after-tax income, since income tax can vary so widely across jurisdictions. I also suggest building your budget on regular (reliable?) payments and any one-time inflows, like tax refunds or bonuses, can be used as strategic money to accelerate your goals.

If you have rental income or other sources income where there are direct expenses, track this separately. Track the income and associated expenses and calculate the net amount. The net amount is what goes into your budget. 

Step 3: List your expenses

Here is where you will list where you spend your money.

List how much you spend per category per month:

• Housing

• Transportation

• Groceries

• Savings

• Debt repayment

• Childcare

• Being connected – phones, internet, tv

• Clothing

• Recreation, Entertainment, Dining Out and Travel

• Life Insurance, Medical Insurance & Other Longterm

• Personal

• Anything else

If you have annual expenses, such as paying your life insurance once a year, divide these figures by 12 to get a monthly expense.

Step 4: Calculate your Net Amount 

After completing your income and expenses, take your income, minus your expenses and figure out the net.

Income – expenses = net

Your net is how much you have left over at the end of each month. Your net must be zero or positive so that you are not spending more than you earn.

If your net is a negative number, adjust your budget until you can make the budget balanced. Do you really need to be spending so much on dining out? Does your investment in shoes need to be scaled back?

If you haven’t done so already, get the free cheat sheet on how much you should be spending.

Step 5: Track your actual expenses

This is an incredibly important step and one that most people do not do. Do you actually spend what you think you do? This is hard to know unless you track your spending.

How do you track your spending? You can either:

1. Keep all your receipts, bank logs, etc and tally it up at the end of the month.

2. Commit to only using cash for a month. Use envelopes or jars dedicated for each category and only spend the cash within it. 

3. Use an app that syncs with your bank account, like YNAB or Mint.

Personally, we use option 3 as it is much easier – and therefore doable for us – to have the transactions posted in an app and then sort them into each category.

Once you know where you are actually spending your money, ask yourself if this is line with your values and goals.

Then go back and revise your budget as necessary.