When you have a family, money becomes a matter of doing what’s best for the household as a whole. Creating a family budget for the year is a good way to make sure that you can take care of your needs, and even enjoy some of your wants. Don’t worry about the fact that the year is already underway, either. It’s always a good time to create a budget designed to help your family reach its goals.
Where does the money go?
“I would put on paper, preferably in an Excel spreadsheet, all of my monthly expenses so I can see where my money goes,” says Kyle O’Dell, the president of Secure Wealth Strategies. “Just doing this one task can be eye-opening for most families.”
Many of us have no real idea of what we are spending our money on, so listing out all of our expenses can provide a visual starting point. Even if you don’t use an Excel spreadsheet, the act of listing everything out can be helpful.
Don’t just sit down with your life partner and figure it out, either. “It’s important to teach kids the value of a dollar,” O’Dell says. “They need to understand that there is only so much money to spend on toys or movies or whatever they enjoy doing.”
When you gather the family to see where the money is going, you can identify problem areas. It’s also possible to figure out what your values as a family are. Look at your spending, and determine whether or not it fits with your family priorities and values. A good budget for the coming year starts with a family discussion of what really matters to you.
Create a budget based on what matters
After looking at where the money goes, and determining what you actually should be doing with your money, it’s time to re-allocate your resources. If you want to pay down debt and save up for retirement, those are the items that should get top billing in your family budget for the coming year.
“You have to learn and condition yourself to pay yourself first each month,” says O’Dell. “Before even one dollar gets spent, you must save money. If you have money, you have control over most situations.”
One of the difficulties is reconciling differing views of how money should be spent in a family. O’Dell suggests dividing monthly expenses into different categories, and then classifying those categories as needs or wants. “If you are talking about a need such as food, gas for the car or utilities, I think those items are pretty simple and straightforward to agree upon,” he says.
“Expenses that are beyond needs, such as going out to dinner or a movie, or new clothes, are items that everyone will have different opinions on,” O’Dell continues. “Sometimes it’s not easy to compromise.”
In order to ensure that everyone has some money to spend as they like, O’Dell suggests an allowance. “As long as the family is saving money and have a plan to get out of debt, I believe everyone should have some type of allowance or money for entertainment,” he says. “This money can be used for anything you want personally. This is your guilt-free, fun money.”
Involving the children in family budgeting is important because it helps them learn about money and compromise, and it gives them a stake in the family finances. Get their suggestions for what the “want” categories can be used for. You can also budget for shared goals, like vacations. Each month, everyone can use part of their “fun” money to put toward the vacation.
You can also use some of your budget to teach your kids valuable lessons about how to use their money. O’Dell says that you can pay part of your child’s allowance in stock to teach them what it means to invest. Show them how their investments grow over time at a rate that’s better than an allowance. While your kids still need cash to learn how to make their own budget decisions, don’t neglect the investing aspect.
Sticking with your family budget
It’s much easier to stick with a family budget when it’s based on your priorities and values. When the whole family is working together, it’s also easier to be accountable. O’Dell likes the idea of envelopes so that families can see what is going on with their money. “I’ve found people are more disciplined when they have cash to spend and see what they need to make last for two weeks,” he says. “It’s easy to pay with plastic and we lose track of our budget too easily if we pay with plastic.”
Even if you don’t want to use cash, you can still track everything. Manually enter credit and debit transactions into personal finance software. At the end of the month, you can sit down as a family and evaluate your progress. Make it a point to “check in” with your budget regularly, and you will be far more likely to stick with it this year — and in years to come.