Financial Planning 101: Tips on Building a Family Budget That Works

Financial Planning 101 Tips on Building a Family Budget That Actually Works FSCB Blog

Family dynamics change, which means your family’s financial planning needs to change as well. When you first start out, it’s just you and your spouse, and managing day-to-day expenses may not seem that complicated. However, when you start adding children to the mix, family budgeting can become infinitely more complex. Careful financial planning is a key way to care for your children, prepare for their future needs, and save for your retirement.

Consider how many expenses come with a growing family. Basics such as the cost of housing and groceries increase. Then you have additional medical and childcare expenses. And as your children grow, you have to worry about school, club sports, special activities, and a host of other expenses that you may not have thought of.

Your only hope is being smart about kid-related expenses. That starts with creating a realistic family budget that accounts not only for everyday expenses, but also for the unexpected. Here are some financial planning tips to help you get started creating a family budget that actually works.

Budgeting for the Basics

When creating a workable family budget, you have to consider all of your expenses, including financial planning for future needs. Unfortunately, too few American families know how to budget, which is why 78 percent are living from paycheck to paycheck.

Start with a list of all monthly expenses, including fixed expenses, such as rent or mortgage payments, car insurance, health insurance, and other costs. Then calculate the average costs for variable expenses such as groceries, transportation costs, car repairs, gasoline, and so on. Be sure to estimate on the high side for variable costs.

Download A Complete Guide to Budgeting to learn how to create a budget that  works for you.

As part of your family budget, be sure to allocate money for other financial goals. For example, do you need to apply more cash to debt reduction? There is good debt, such as mortgage debt and student loans, and there is bad debt, such as credit card balances. If you pay only the minimum on your credit card bill each month, you will rack up a lot of interest fees and it will take much longer to pay it off, so try to set aside more than the minimum to pay off credit card debt faster.

It’s also important to maintain an emergency fund. You should maintain at least three months’ living expenses in case of an emergency.

Above all, do not forget to put aside cash for savings. A survey by GoBankingRates found that 46 percent of millennials have no savings. That means no money set aside to purchase a home or for retirement. In fact, 42 percent of all Americans aren’t saving for retirement. You should make saving a priority. Consider applying the 50/30/20 rule of budgeting: 50 percent of your take-home pay for family needs, 30 percent for savings, and 20 percent for things you want. This approach will help you build a tidy nest egg.

Considering Child Costs

When you add kids into financial planning, the variables become murkier. It becomes harder to estimate expenses such as groceries and entertainment. You also have to add in other expenses, such as childcare, clothes, and so on. Medical expenses will change as well, and you need to plan for unexpected trips to the pediatrician.

Your best financial planning strategy is to add these expenses into your budget using your best estimate as to monthly costs. Over time, these estimates will become more realistic as monthly expenses average out.

As your children grow, you will have to adjust your budget. You will need to add in more school expenses, including more clothes, school supplies, field trips, tutoring, gas for carpools, and so on. You also will need to start paying for extracurricular activities such as after-school sports. As they get even older, you will have to include additional expenses, such as smart phones and car insurance.

Every realistic family budget has to be adjusted regularly to accommodate changing expenses. Revisit your budget every few months to make sure your estimates are still in line with what you are really spending each month. If you find your expenses are getting out of control, consider where you can save money. You can reduce your daily expenses, for example, by foregoing your morning latte or bringing your lunch to work. Also reconsider other expenses, such as your housecleaning service or those extra cable channels. Every little bit helps.

Long-Term and Short-Term Financial Planning

As part of financial planning, you should establish long-term and short-term goals. In addition to monthly expenses, you will want to save for things in the near future, such as a new car, a family vacation, or a home remodeling project. You will want to save for long-term goals as well, such as a college fund, a new house, or retirement.

As you incorporate savings goals into your budget, consider the best savings vehicles for each goal. For short-term goals, consider a savings or money market account that will pay interest but still leave your money readily available. You might also look for checking accounts that pay cash back or help you save by rolling money into your savings. For long-term goals, you might consider putting some of your savings into CDs, which yield a higher interest rate but require you to commit your money for longer periods of time, typically from a few months to 10 years.

Financial planning for retirement requires a different strategy. You want to maximize your 401(k) retirement savings at work. This may reduce your take-home pay, but it does give you a nice, tax-deferred fund for retirement. To supplement your retirement plan, consider investing in an individual retirement account (IRA) or allocating some of your savings for investments.

Every family needs a working budget to manage everyday costs, but if you can develop a more realistic budget, then you will have enough money to plan for the future. Careful financial planning can go a long way toward helping you build a family budget that works for you and helps you reach your financial goals.

Download A Complete Guide to Budgeting

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