How To Make and Stick to a Family Budget According to Experts

A Mind over Money study by Capital One and The Decision Lab revealed that 77% of Americans admit to worrying about their financial status. The same study reported that 58% of respondents believe that finances control their lives. Finances can be a source of anxiety in many households.

This can be partially explained by the fact that many Americans lack a financial plan. 60% of Americans, according to Credit.com, don't have a budget, and according to CreditDonkey, only 32% of American homes create a monthly budget. Making a budget is one approach to taking control of your family's finances. Unfortunately, not many find it simple to create a budget.

The biggest obstacle, according to one in ten Americans without a budget, is that they don't know how to make one. Two financial professionals went to great efforts to provide their best advice for us to share.

What a Budget Means for Your Family

According to Lyle Solomon, Principal Attorney at Oak View Law Group and a financial expert with 30 years of experience, a budget is basically just a strategy for your money at its most fundamental level. Making a well-thought-out financial plan lets you take charge of your money and spend it wisely.

Andrea Woroch, consumer and money-saving expert, likens a budget to a road map for your money, telling it where it needs to go based on the goals you have in mind, along with your current necessary living expenses. Without a budget, making changes and achieving those goals will be hard. It's also impossible to make a change if you can't see what's wrong in the first place. A budget allows you to identify areas you need to cut back on where you are overspending.

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What Is a Typical Family Budget

Basing his assertions on recent studies, Solomon comments that American households spend 82% of after-tax income, which amounts to $61,334 every year or $5,111 every month. Housing, transportation, taxes, and food make up 78% of household budgets. For most Americans, housing is their biggest expense, which accounts for 21% of a household's monthly spending. 10% of an American household's annual income is spent on housing-related expenses, while 12% of a typical household's income goes toward transportation.

In addition, the typical household deducts 11% of personal taxes from their gross income. 9% of the average American household's income goes to food, and 6% goes to healthcare. Annually, the average American household contributes $7,246 to Social Security, pensions, and personal insurance.

Certainly, these numbers aren't the same for many households. The family's location within the United States is the most influential of these variables. Compared to Mississippi, the average cost of living in Los Angeles, CA is a lot higher.

According to Woroch, budgets vary from family to family, depending on a few big financial factors, including income, expenses, and savings goals. As such, breaking down a family budget depends on your financial situation.

A “typical family budget” does not exist in the strictest sense. Budgets of families living in the same area, with the same demographics and income, can and frequently do differ greatly. One family's values, interests, and goals may have little in common with those of another. Budgets that come ready-made fail to take into account the differences in our lives and the inevitable evolution of our circumstances.

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Elements of a Family Budget

Solomon recommends the following essential components that make up a typical family budget:

Housing

This is the largest category for the majority of budgeters. A housing expense is everything you spend on maintaining a roof over your head. This covers rent or mortgage payments, real estate taxes, Homeowners Association dues, and house upkeep expenses.

Transportation

Everyone must travel from somewhere to somewhere, regardless of where they live or their way of life. This budget component typically covers the cost of the vehicle, tolls, gas, maintenance, registration, and DMV fees.

Food

Every home requires regular trips to the grocery store. Many people include eating out in this group. However, if you frequently splurge on things like expensive wine and gourmet cuisine, Solomon says it's probably best to put your food expenditures that aren't related to groceries in the “non-essentials” area.

Utilities

Every family needs access to water, power, heating, ventilation, and air conditioning in order to function properly. Solomon suggests adding all maintenance charges for these services under your “Utilities” category. This covers your costs for gas, electricity, water, and sewage. It will also cover most families' internet, cable, and phone service costs.

Insurance

Many people who budget choose to group insurance with the items they are insuring. For instance, “healthcare” might include health insurance. Transportation would include auto insurance. This is a very viable choice. Other budgeters break out insurance as one of their fundamental budget areas. If that is how you'd prefer to do it, then your insurance section ought to cover all of your insurance expenses.

Healthcare

You must include enough money in your budget to meet healthcare charges if you want to maintain your health and general well-being. Long-term health is significantly improved if you budget for routine medical treatment. Any money you might spend on healthcare falls under this budget category.

Debt Payments, Savings, and Investments

Although it doesn't significantly affect your daily life, saving money is extremely important for your future financial stability. Every family should, at the absolute minimum, have a retirement account like a 401(k) or IRA, as well as an emergency fund set aside for unforeseen costs. This budget category can also be used to pay off any debt, including credit card balances, personal loans, and student loans.

Non-essential Personal Expenses

Non-essential personal spending includes things like gym memberships, clothes and shoes, home furniture and decorations, and gifts.

Entertainment and Recreation Expenses

Making time for leisure is crucial to preserving a positive work-life balance. This spending area can cover items like sporting events, vacations with the family, hobbies, etc.

Solomon further notes that this list of budget categories is merely a starting point. He emphasizes that the secret to success is to personalize your spending plan so that it makes sense for you.

Steps To Creating a Family Budget?

According to Solomon, the following steps will help you create a realistic family budget.

Know Your Goals

Consider your objectives while creating a family budget. Once you've made up your mind, the next thing Solomon says is to put it in writing so you may refer to it later and remind yourself of why making a budget is necessary.

Consider Using Budgeting Software Available Online

Even if you're not very tech-savvy, it can be helpful to use a budgeting app or download online budgeting software to your PC. Digital budgeting tools are easy to understand and use and help cut down on mistakes. Often, they are given away for free or at a fair price.

Gather All the Information Related to Your Finances

To create a budget for your household, you must first have an accurate picture of your monthly income and expenses. Payment documentation includes bills, receipts, bank statements, and pay stubs. In addition to double-checking your paper records, it's important to review your online account information, such as electronic billing and automatic bill payment.

Categorize Each Expenditure

Identifying where and for what purpose your money is being spent is the next step. Break down your monthly expenses by classifying fixed costs like rent, loan payments, and utility bills separately.

Do the Math

Solomon recommends writing down or entering all the data you've acquired thus far into an Excel spreadsheet. But a better option, he says, is to consider using internet budgeting tools that will not only figure out your spending plan but also offer advice on how to cut back. By entering the necessary information into the app of your choice, you can make a family budget that fits your needs.

Find Out Where You Can Reduce Spending

Look at your discretionary spending and think of methods to cut back. For instance, think about making meals at home and bringing them to work instead of eating lunch at a restaurant. Avoid paying full price when you shop by using coupons, or you can wait for products to go on sale.

Do It Every Month

In order to track your success and seek methods to increase your savings, you need to update your income and expense information at least once per month. Consider the time you spend each month maintaining your budget as a chance to take stock of your progress.

Factors That Can Impact a Family Budget

Because no two months are the same, budgets might alter over time. A budget that is copied and pasted every month cannot be maintained. For instance, December in most households looks considerably different from June. What worked in the prior budget can be continued, but what didn't or won't work in the current one should be eliminated. The following variables, according to Solomon, can have an impact on a family's budget:

The Income

How much a family spends depends on the amount of money available or the family's overall income. Solomon also notes that income-constrained households spend more on food. Higher-income families invest more money in pleasures, such as entertainment and education.

Size of the Family and Its Members

The size and composition of the family have an impact on spending. The number of adults and children determines the size of the family—the more money spent on food, clothing, and shelter, the more mouths to feed. As children get older, more money will be spent on clothing and schooling. When people leave the house for work or education, they will spend more money on transportation. Health and medical care costs will be higher for the elderly.

The Family Life Cycle

Solomon admits that the financial life cycle of the family is crucial. For instance, as a newlywed couple begins their family life, the majority of the family income is initially used for setup costs. Whereas families in the growing stage require money for the kids' schooling, clothing, food, and other expenses.

Some growing families will spend more money on furniture, durable home products, etc. The wedding celebrations for their children are a substantial cost during the contracting stage. The family's income gradually decreases during this phase. Therefore, expenses should be minimized.

Occupations

The family's budget can occasionally change depending on the family members' jobs. Some jobs offer special perks like free housing, kid-friendly educational opportunities, health and medical coverage, travel reimbursement, etc.

The Location of the Family's Residence

Depending on where you live, you might spend more on some items and less on others. For example, spending on food will be higher in rural areas. However, spending on education, recreation, transit, and lodging in metropolitan regions is higher.

Socio-economic Status

The vocations, degrees of education, and income of the family members all impact the family's socioeconomic standing. With socioeconomic status, the price of interior design, higher education, club membership, housing, recreation, etc., will rise. The family's way of life ultimately determines how much money is spent.

Personal Interests of Members

Spending is based on personal taste. For instance, one person might favor expensive jewelry and perfumes, while another might favor simpler options. The family's choices about the construction of a home, funding for the kids' higher education, and other future plans also affect expenditure.

The best method of money management, Solomon says, is to maintain a balance between income and expenses. Whatever the income, effective money management, according to him, is necessary for a contented, prosperous, and peaceful family life.

Handling Debt

Woroch recommends building your debt into the budget just like savings need to be added. There's a tendency to just add the minimum payment due to your budget, but that won't help you get out of debt fast. According to Woroch, you need to pay more than that each month. If possible, aim to pay two to three times what's due and build this into the budget.

“However, don't compromise savings in order to pay down debt,” she warns. “Savings is important for helping you stay out of debt in the future because you need cash for unexpected bills.

Otherwise, you will fall back into debt if you need to use a high-interest credit card to pay for a medical bill or car repair.” You can automate your savings for an emergency fund, which makes it easy to budget for and can be modified as necessary over time.

She adds that if your debt payment is huge due to a high credit card APR, consider consolidating your debt. This will ease your budget and speed up repayment, saving you more money over time on potential fees. In addition, she recommends transferring your current credit card debt to a new balance transfer card that offers 0% interest on balance transfers.

This buys you more time to avoid paying interest while you work hard on paying down debt or at least gives you time to get through a tough economic time without fees piling up.

Another way to help you handle debt without jeopardizing your budget is to earn extra cash. “All the extra money you earn can give you some needed breathing room to afford rising consumer prices while also helping you pay off debt and boost savings,” Woroch says.

When You Have a Fluctuating Income

Woroch admits that irregular income can make budgeting tough. The key to budgeting with an irregular income, she says, is to set your overall expenses around your lowest monthly income. According to her, this gives you some financial security, and you can always spend more or boost savings when you make more. You can also adjust your numbers if you consistently increase your income month after month.

At the same time, she advises building up a few savings accounts—one for emergencies, one for taxes, and one for non-fixed expenses that fluctuate. You can use this fund if you make less than you budgeted for in one month. “It's also important to plan expenses in advance,” she says. “For instance, future oil changes, next month's wedding, etc. Knowing your future expenses can also allow you to make better spending decisions with the money you have now.”

Overall, she concludes that budgeting is more important with an irregular income so you know how to plan your money for months in advance.

Wrap Up

One way for families to keep track of their finances and create something close to reality is to meet once a month to discuss the previous month's spending and plan for the upcoming month's costs. Encouraging and modeling healthy money conversations help children build strong and lasting financial habits. At the end of the day, no one should dictate the trade-offs you must make, but helpful input from every family member, where possible, is necessary to make these decisions and trade-offs.

This article was produced and syndicated by Wealth of Geeks.


Amaka Chukwuma is a freelance content writer with a BA in linguistics. As a result of her insatiable curiosity, she writes in various B2C and B2B niches. Her favorite subject matter, however, is in the financial, health, and technological niches. She has contributed to publications like ButtonwoodTree and FinanceBuzz in the past. In addition to ghostwriting for brands like Welovenocode, Noah and Zoey, and Ohcleo, amongst others.  You can connect with her on Linkedin and Twitter.