We have all been there. Getting to the end of the month with no savings, just wondering where the money may have gone and no monthly budget.
It’s painful, stressful, and frustrating. But it doesn’t have to be that way. It’s time to build a family budget that actually works.
Most of us never received the financial guidance that we needed. Parents can only pass down what they know or learn and our educational systems do a poor job at teaching financial literacy. Most of us have been taught that debt and credit cards are a way of life and can act as a cushion if we run out of money.
Heck, most of us have probably never really created a good monthly budget, created clear goals, or planned for upcoming expenses. It’s time to make a change.
Most people let money tell them what to do. They pile up debt and let companies demand minimum payments. If you want to be different from everyone else, you have to start acting different and start telling your money what to do.
Monthly Budgeting: Build a Family Budget that Actually Works
You need to create a monthly budget. There is a little over head to monthly budgeting, but the payoff is huge. All it takes is a little time at the beginning of the month to plan out all of your spending. If you are new to personal finance and budgeting, you may want to check out our personal finance article HERE. You just need to calculate 2 things.
Monthly Expenses and Monthly Income
That’s it. So what’s the best way to do that? We will show you in the example family budget below!
This one should be fairly simple for most part. You just need to look at your paycheck and see how much money you (and your spouse) take home each month after taxes and benefits. Let’s take a quick look at what you might include in the income portion of your budget. Take a peek at the income portion of the example family budget below.
Likely, the biggest problem some people may face is having some variable income.
Well I do make a variable income! So, now what?!
Well, it’s still fairly simple. You are going to have some idea of what you will make per month at a minimum. You create your monthly budget using that minimum, then any additional money you make can go to debt, Roth IRA’s, college savings, etc. Now, you might still have some months that come up a little short, that is where your emergency fund comes in. However, you should use an emergency fund very sparingly and only for true emergencies. More about emergency funds below in the Money Left Over section.
Here is the best way to do it.
When you have a variable income you want to make sure that you pay for all the necessities before everything else. That way, you can forgo some of the “pleasures” of life if you need to. In the end, if you don’t have enough money to pay for the necessities, use your emergency fund. NEVER use it to pay for comforts or pleasures.
Next let’s go over monthly expenses and break them into 2 categories. Necessities and Other Expenses.
Monthly Expenses: Necessities
If it is charging to your bank account on a recurring basis, you need to track it and save for it. You cannot build a family budget that actually works if you have more expenses then income, so you MUST track your expenses.
You want to take into account every single monthly expense. It does not matter if it is as small as your $1 payment for your iCloud storage or your $1,000 mortgage. Monthly expenses need to be well calculated and as exact as you can make them. Chances are, you will miss a couple of things, but you can adjust your monthly budget accordingly as the months go on. These expenses should also be necessities, not items that are for enjoyment.
Once you compile a list of your recurring monthly expenses, it will give you a pretty good idea of what you can do with the rest of your monthly budget. Lets take a quick look at an example of what your monthly expenses might look like. Let’s have a look at the expense portion of the example family budget below.
Example Family Budget: Monthly Expenses
You will also probably notice that there is a category labeled as This and That. My family actually uses this budget item so that we can cover a small number of unplanned expenses that might come up each month.
Examples: pacifiers, humidifier for baby, medicines, water filters, various overages from other budgets.
Monthly Expenses: Other
Now we can add in the other expenses that are not necessities, but we might enjoy. In the example below we listed all other (or comfort) expenses in pink to set them apart. That way, when we review our monthly budget its simple to separate and remember how you classified the expenses. It’s time to take a look at the expense (other or comforts) portion of the example family budget below.
Example Family Budget: Monthly Expenses (Other or Comforts)
Note: Originally our monthly budget had Netflix, Hulu, and iCloud as different line items. However, after a few months we found that it was just a little more simple to bundle them together and make the number significant. It also allows for less overhead when we do our budgeting each month, I’ll explain more about that later.
As you can see, our expenses have gone up significantly, but none of the items listed are necessary for survival or work. If we absolutely had to, we could eliminate them from the budget during any month where money is tight.
Great, I have managed to build a family budget that actually works, but I still have money left over. What’s next?
Money Left Over
Chances are, once you finish your monthly budget you will have money left over. Now you have to figure out what to do with it.
Wait a second, I don’t have anything left over at all!
If you don’t have any money left after your expenses, it’s time to seriously go back over your budget and see what you can eliminate. If you cannot make your monthly expense each month AND save, you are in trouble. That is the road that leads straight to debt. It might mean an extra job, side hustle, or working over time, but something has to be done to keep you afloat. If you want to build a family budget that actually works, you are going to want some money left over.
You’re right! I do have money left over!
Excellent! Now it’s time to figure out how you should leverage that sweet, sweet, cash. Here are some simple family budget tips for you!
Simple Family Budget Tips for Left Over Money
1. Save an Emergency Fund
I would suggest two different ways to do this.
- If you ARE in debt, save 1 months expenses, then work on paying off debt. After you pay off your debt (except your mortgage) you can move on to the second way.
- If you are NOT in debt, save 3–6 months of expenses for emergencies.
It’s pretty simple to calculate, you just save for you necessities for 1 or 3–6 months. Then you only use the emergency fund for emergencies. When funds are taken out, you add an expense to your budget to build the fund back up.
2. Pay Off Debt
I know, it’s not super exciting. Still, paying off debt is important. If you want to retire, pay for your kids college, or buy yourself that sweet Mustang, there is one thing that you need to do that. Money.
Let’s go a little deeper with that. Sure, maybe you have some money left over after all of your monthly expenses, and that’s great. However, many of us have a tendency to lean on credit cards, interest free loans, or other financing to get the things we want. That’s a problem because you need cashflow.
Every month when you are making payments for financed “assets” you are giving away chunks of your cash flow. Do that enough and you will end up with nothing left to save. So it is paramount that you free up all the cash flow you can!
Note: My wife and I are still working on paying off our own debts, but we have paid off my wife’s student loans and our phones (financed through Verizon at 0% interest). Doing this has already allowed us to increase our monthly cashflow by over $100.
Still not convinced?
I think the easiest argument to make might be this: No one has ever complained about too much cashflow, but there are definitely those who complain of too little.
There are many ways that you can invest. Let’s just stick with a list of examples to keep it simple.
- 401 K — Excellent investment IF you employer matches. Generally different mutual funds provided by a company your employer chooses. You will pay taxes on the growth, but its worth it due to the match.
- Roth 401 K — Same as a 401 K, except, taxes are paid when money is invested. Your interest is tax-free.
- Roth IRA (Mutual Funds) — A favorite among many. Roth IRA is just a tag with rules attached, mutual funds are the investment. Funds are taxed when added to the investment, but interest is tax-free!!!
- IRA (Mutual Funds) — Again, the IRA is a tag with rules attached, mutual funds are the investment. Funds are not taxed when added to the investment, you pay taxes when you withdraw.
- 529 — For those of you with Kids out there, you can use this to save for your kids college. Your mileage will vary on this one based on state. Look for a future post to go into more detail.
While there is no magic number to tell you how much you need to invest. If you want to be able to enjoy your retirement, investing 15% of your income should be a safe bet. Depending on your age.
Find more information on investing for retirement HERE.
4. Pay Off Your Mortgage
No mortgage = more cashflow
If you have more cashflow, you can quickly save up funds to move to a bigger house (if you want) or you can double down or your investing. Do this early enough and you might even be able to semi-retire fairly early in life. Not to mention, you are eliminating risk since you are no long obligated to monthly mortgage payments! As long as you pay your taxes, you probably aren’t going to lose your house.
When you have a tight monthly budget, good investments, and still have cash to spare it’s easy to be generous. There is a great feeling that comes along with paying for a friends meal, helping those in need, or just surprising someone with a gift. Heck, you might even be able to pay for your whole family to go on some crazy dream vacation!
6. Including Investments in Your Monthly Budget
Now that you know what you plan to invest, you should add it to your budget as an expense. That way you ensure that you are allocating all of your money as you intend. If you are investing 15% of your income, calculate that amount and add it as a budget item. Maybe you are paying an extra $1000 toward mortgage principal, add that in as well.
If you do this, you will know where every single dollar is going. You will be in complete control of your money.
That’s it for our simple family budget tips! Let’s move on and take a look at the budget as a whole.
Full Monthly Budget
Here is what the full monthly budget looks like. In this example we will assume that all money left over is going to be applied to the car payments expense. Finally, let’s see wha the full budget looks like in our example family budget below.
Example Family Budget: Full Budget
You can find this budget in Numbers if you have a Mac! That’s it for the example family budget, let’s keep going to…
Rules and Constraints
Now it’s time for the REALLY fun stuff. Rules.
Whether you are single or married it is extremely important to lay out some ground rules when it comes to your budget. There will need to been an agreement with your partner or yourself of how you will be using each budget item. Some of them are pretty straight forward, however, others are a little more complicated.
Here is all you have to do. Look at each line item and determine if the line item is not for ONLY 1 specific expense, make a rule. In my house we only have a couple of rules for our budget line items. I will list them below so you have an idea of where to start!
- Groceries — Only to be used when we go to the grocery store together to purchase groceries, unless otherwise discussed.
- Dinners Out — Only to be used when my wife and I eat dinner together. Whether it’s dine in, carry out, or fast food. All individual outings are spent from our own allowances.
- This and That — Only to be used when my wife and I both agree the purchase is necessary.
That’s pretty much it for us! As you can probably see, the most important thing for couples in budgeting is communication. The second most important for couples (most important for individuals) is integrity. You have to be able to stick to the rules and agreements you have with yourself and others. No matter how easy it is to break them.
Thanks for reading! Be sure to tune in soon for an article on exactly how my wife and I do our monthly budgeting AND banking with Simple. These two go hand in hand for us!
Now get out there and build a family budget that actually works!
Originally published at thinkhub.co on June 12, 2018.