Your money shouldn’t be a mystery, but it is to many people. In fact, 65% of Americans don’t know what they spent last month, according to a 2020 survey conducted by budgeting app Mint.
“People are always more optimistic about their finances than they should be,” says Howard Dvorkin, a certified public accountant and chairman of Debt.com.
That optimism, combined with a lack of knowledge about where money is going, could lead people down the path to debt or even bankruptcy. However, a family budget can serve as a map to keep you on the road to financial stability.
How to make a family budget
Before sitting down to make a family budget, you need to understand and embrace the importance of this financial tool.
“The most important step is the mindset,” says Tatiana Tsoir, a certified public accountant and advisor with consulting firm The Bold Method. “You need to understand why you want or need it.”
For some people, a budget can provide a way to dig out of debt. Others may have a specific savings goal such as a vacation, retirement or a new vehicle. Still, others simply want the peace of mind that comes with knowing they can comfortably pay their bills each month.
Numerous budgeting tools are available to make the process easier. For instance, Debt.com offers budgeting worksheets and there are a number of family budget apps.
Regardless of how you decide to record your spending plan, the following are crucial steps for making a family budget:
1. Bring both partners together.
2. Create goals.
3. Track income and expenses.
4. Evaluate your current situation.
5. Trim costs.
6. Build savings.
7. Get out of debt.
8. Lower your taxes.
9. Check in frequently.
[READ: 10 Simple and Free Budgeting Tools.]
Bring both partners together
A budget will never work if the adults in the family aren’t on the same page. Before you start crunching the numbers, have a frank discussion with all decision-makers in the house to hash out shared and individual financial goals.
If having nice shoes is important to one person, the other partner doesn’t get to criticize or demean that choice. Similarly, if someone prefers saving to spending, their preference should be respected. However, both partners need to understand and accept that compromise may be necessary to create a budget that works for the entire household.
Older children may also benefit from being included in these conversations so they understand why parents make certain purchasing decisions.
“They start learning the minutiae of how to do budgeting,” says Snigdha Kumar, head of product operations for budgeting and finance app Oportun.
Create goals
Whether your budget succeeds or fails could depend largely on whether it aligns with your personal and family priorities. Again, this is why sitting down with all decision-makers in the household is crucial.
Decide together what is important to your family. That could be one parent staying home to raise children, an early retirement or extensive travel. Assuming the goal is realistic, create your budget so it will funnel money toward achieving that dream.
Track income and expenses
Before you can write a budget, you need to understand your current financial situation. Begin by tracking or reviewing 60 days’ worth of transactions through your bank and credit card accounts. This will be crucial to identifying what money gets lost in your household’s black hole.
“You need to understand the health of your finances,” Kumar says.
This doesn’t have to be a long or arduous process, either. Many banks and credit cards will aggregate account information and produce income and expense reports. You can also turn to beneficial and free budgeting tools, such as apps from Mint and Oportun.
Evaluate your current situation
As you track expenses, place them into categories that make sense, such as housing, entertainment, dining out and debt payments.
Once you know how much you spend in each category, determine which expenses are fixed and which change throughout the year. It’s also helpful to identify which categories are discretionary, meaning they cover expenses that are nice but nonessential for your family.
Also, be sure you are accurately recording the amount of income available to spend each month. It’s a mistake to budget based on your gross pay.
“Figure out your income net after taxes,” Dvorkin advises. “It’s not what you make; it’s what you keep.”
Trim costs
If spending in one category is too high or if there is no money left for savings or debt repayment, it’s time to trim expenses.
For instance, dining out tends to be a drain on many budgets. Menu planning, shopping sales at the supermarket and buying items in bulk can all reduce the cost of groceries and make it more economical to eat at home. Cable, subscription services and impulse purchases made online are also low-hanging fruit when it comes to reducing household spending.
A family budget also needs to take into account irregular expenses for children. “With kids, let’s be real,” Tsoir says, “there’s always something that comes up.” Failing to take these expenses into account can throw your whole budget off and, depending on the total cost, you may need or want to limit your children’s extracurricular activities.
[READ: How the 70/20/10 Budget Rule Works]
Build savings
Savings should be a top priority for any money left over after monthly expenses are paid. While it may be tempting to focus on paying down debt first, an emergency fund is equally important. Keeping enough money in savings to cover three to six months of expenses is a common rule of thumb.
“Life has a way of sending unexpected things all the time,” Kumar says. “A very simple way to (prepare for) that is to have a rainy day fund.”
After an emergency fund, retirement is the next savings priority. Workplace 401(k) accounts and IRAs offer tax incentives, making them a good spot to deposit money for retirement. Many employers will match employee 401(k) contributions up to a certain percentage, and workers should contribute at least enough to their retirement plan to receive the entire match.
Get out of debt
Having adequate savings is essential to creating a stable financial foundation, but that can be easier said than done for some families. “If you’re in debt, that’s not a possibility,” Dvorkin says. “If you’re living paycheck-to-paycheck, that’s not a possibility.”
Getting out of debt is a crucial step to crafting a family budget that is sustainable in the long run. Debt can siphon away a significant amount of money for interest charges, and it limits the cash available for saving or spending priorities.
One of the simplest strategies for getting out of debt is to direct any extra money in your budget toward the payment of your smallest debt. Once that debt is paid off, redirect all your extra money to the next smallest debt and so on, until all debt is eliminated from your family budget.
Lower your taxes
Don’t overlook the importance of taxes when budgeting. Reducing the amount you pay to the government can free up money for other priorities. What’s more, putting money aside into tax-advantaged accounts can help ensure you’ll have funds available for future expenses such as health care, college and retirement.
If you have a qualified high-deductible health insurance plan for your family, you can deduct up to $7,750 deposited into a health savings account in 2023. That money is also tax-exempt when used for medical expenses. For college savings, consider a 529 plan which doesn’t provide an immediate federal tax deduction but may have state tax benefits. These accounts grow tax-free and can be used tax-free for qualified education expenses.
As for retirement, a traditional 401(k) or IRA offers an immediate tax deduction on contributions. Withdrawals in retirement are subject to tax, though. If you’d like to avoid paying taxes later in life, use Roth accounts instead. Contributions to Roth 401(k) accounts and IRAs aren’t deductible, but the money grows tax-free and can be withdrawn tax-free after age 59 1/2.
[Read: How to Save Money When Online Grocery Shopping.]
Check in frequently
Once completed, a budget should serve as a road map for how a family plans to spend its money going forward. To be effective, it should be consulted frequently to ensure actual household spending is in line with what is written. As family circumstances or priorities change, the budget can be adjusted.
“Budgeting is not a sprint,” Kumar says. “It’s a marathon.”
Meeting monthly to review the previous month’s spending and look ahead to the coming month’s expenses can help partners stay on top of family finances. Combining a budget review with a date night can be a good way to make this process feel less like a chore. Regardless of how you structure check-ins, remember all partners are on the same team and should work together to reach financial goals.
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How to Create and Maintain a Family Budget originally appeared on usnews.com
Update 04/18/23: This story was published at an earlier date and has been updated with new information.
