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How to Create a Family Budget?

Živile Šarkauskaite

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Živile Šarkauskaite

April 24, 2023

Managing money to support a family may appear to be a challenging task. Though it looks like you have not spent anything, your bank account balance comes out as a negative surprise, and then you gawk not knowing where the family’s budget money goes.

Sounds familiar?

Well, managing your household finances does not have to be that complicated. The key to improving your family’s financial situation and saving some extra money is mastering one thing – creating a family budget.

What is a typical family budget?

A family budget is a spending plan that helps you track your money and plan weekly or monthly expenses. Budgeting makes it easy to identify your spending and manage money, so you can optimize your spending habits and set savings goals.

Creating a family budget is not a way to constrain but to control your spending and feel more confident about unexpected costs and the future. It also helps to attain bigger family goals, such as going on a family vacation, saving for college, or buying a bigger house.

What are the seven essential items for a family budget?

Family budgets are usually based on seven main budget categories:

Housing costs

Family housing costs are a significant part of any family budget. You may have to pay for your house maintenance costs such as rent, house insurance, repairs, and maintenance, utility bills (electricity, gas, water, internet, phone service), and other related costs.

The type of housing families choose is the main factor in determining these costs. If they decide to rent an apartment or a house, their household budget will consist of the monthly rent and all the utilities associated with the property.

Renting should be chosen by those who want flexibility and the ability to avoid ongoing maintenance and repair costs. However, the main disadvantages are the high monthly rent payments and not being able to build equity and have a long-term investment.

On the other hand, owning your own home means being prepared for additional costs for maintenance, health insurance, and paying for other fees. It is a reasonable option for those who want to accumulate real estate.

In addition to size, the location of the home can also have an impact on housing prices. The cost of living is higher in urban areas, while housing in less desirable locations can be more affordable.

Food costs

In this case, spending is unavoidable. The only aspect you can manage is planning meals and shopping strategically to take advantage of sales and discounts, thus avoiding food waste. You can also limit the times you dine out or order takeaway.

Cooking at home is usually a cheaper and healthier alternative. You can save money when shopping in supermarkets by keeping track of product prices and discounts and using discount coupons and loyalty programs.

Unfortunately, healthier and better quality food is often more expensive, but it is a significant long-term investment. Also, families can consider growing their vegetables or buying fresh products from local farmer markets.

Transportation costs

two cars

The cost of purchasing and maintaining a vehicle, fuel costs, parking fees, public transportation fares, and other related expenses can be a financial burden. Before deciding on vehicle purchases or commuting options, it is crucial to consider the family’s transportation needs.

The majority of transport costs are usually attributable to owning a car. Although the price of a vehicle may be low, the upkeep of the car makes up the largest part of the costs. Children also contribute to these costs when parents have to take kids to school or they reach driving age, or their transport needs change.

In some cases, public transport can be a cost-effective option. While it is a relatively affordable way of getting around, it is particularly relevant for families living in urban areas.

Personal expenses

Money spent on personal matters is highly dependent on family needs and lifestyle, but they tend to consist of the same core items such as clothing, entertainment, or hobbies.

Clothing is a large part of the expenditure. Kids usually outgrow them quickly, so you consistently have to buy new ones. In this case, shopping sales, buying clothes from second-hand shops, or swapping clothes outgrown by kids are great ways to save money.

Entertainment and hobbies are a big part of personal spending. It could be cinema tickets, a visit to a water park, or even a cup of coffee with friends.

It is easy to slip into overspending in this area, so it is important to decide how much you can afford to spend and how much allowance you can give your kids for personal needs per month. Also, a great alternative is free activities.

Health expenses

It refers to the costs associated with adults’ and kids’ medical care. Regular checkups, dental care, medication for illness or injury, and medical insurance can be costly.

Unfortunately, this kind of spending is usually unforeseen and can affect anyone, so families must have savings for regular and unexpected healthcare costs.

Education expenses

bachelor hat

When you have children, education is an area that covers tuition fees, school supplies, and books.

Also, extra-curricular activities such as music schools or sports practices are the type of education expense that families may need to budget for. Families may need to assess the price/benefit ratio of such activities and consider alternative options if these are not affordable.

The financial status of a family frequently plays a deciding role in the educational institution their children attend and the career paths they can pursue.


There are many different categories of savings, such as retirement, college funds, etc. A critical component of any family savings plan is an emergency fund which can help with unexpected expenditures.

Despite the type of family savings, it is an essential component of financial planning, which allows families to achieve long-term financial stability and meet their financial goals.

The extra category is debt payments. 

Not every family has bank liabilities. However, keeping a strict proportion between family income and expenses is crucial when you buy a property or have a student or car loan. High-interest rates and fees can quickly add up, making it difficult to pay off the debt. In this case, families need to have a plan to repay their loan debts as fast as possible.

How to create a family budget?

Creating a family budget is not as complicated as it first seems. There are four simple steps to follow to make a family budget.

Step 1: Calculate your family income.

If you want to create a family budget, first, calculate the total monthly earnings of you and your partner. Do not forget any additional sources of money, such as side hustle, yard sales, investing, or other activities that let you gain more money.

If you have freelance work and your income varies, base your budget on the lowest possible monthly estimate you typically earn.

Step 2: Have a budget breakdown by budget categories

Now it is time for your spending habits. Knowing when to cut expenses starts with evaluating how much and on what you spend your money. Make sure that you and your kids are on the same page.

There are two types of costs: fixed and variable.

Fixed expenses

These include recurring monthly bills that stay the same. It is mainly housing, insurance, debt, savings, or kids’ daily allowances.

Variable expenses

On the contrary, variable expenses can be different every month. It can consist of money for food, transportation, personas, health, and education. Managing these expenses can be challenging due to unforeseen events that force you to spend more.

Here is where the life-saving 50/30/20 rule in family budgeting comes in.

Here is where the life-saving 50/30/20 rule in family budgeting comes in.

What is the 50-30-20 budget rule?

This rule breaks down the family budget into three parts and shows what percentage of the total expenditure should be made up of.

(A table below)

50% of the after-tax income. Needs: Housing; Transportation; Healthcare; Minimum loan repayments; Basic groceries.

30% of the after-tax income: Wants: Clothes; Family vacations; Entertainment; Hobbies; Dining out; Groceries (other than the essentials).

20% of the after-tax income. Saving: Saving goals; Extra debt repayments.

Spend 50% of your family income on needs.

50% of your after-tax income should cover the most essential family household budget. It includes living costs that can’t be avoided and would be difficult to live without.

Budgets may often vary from one family to another. If it is noticeable that needs require more than 50% of income, it is relevant to make adjustments and cut costs. It could be simply switching to a different phone service, or hunting for discounts or sales when buying groceries.

Unfortunately, cutting costs can also mean bigger life changes, such as finding a new cheaper home.

Spend 30% of your family budget on wants.

While 50% of a family’s income is spent on basic needs, 30% should be used to support wants. This category includes all other expenses that are not essential. It is money to satisfy personal desires that can be lived without.

The intention of implementing the 50-30-20 rule is not to take the joy of life away from the family. It helps you understand the biggest mistakes and indicates you are overspending. A simple rule to distinguish between wants and needs is to ask yourself whether you can live without that item before you buy it. If the answer is yes, these certain expenses are something you do not necessarily need.

Save 20% of your family income.

The remaining 20% should go towards your saving goals. It is an effective way to build financial security and achieve long-term financial goals. Such goals may not necessarily be a new car or a bigger apartment but money for emergency funds or paying off debt.

One of the most convenient ways to save is to automate money contributions. In most cases, you can set up your bank accounts to automatically transfer money to a savings account of your choice once every certain period.

In addition, one way to save more is to decide to transfer an unused part of your income to a savings account each month. It does not mean that you have to give up certain activities or hobbies, but reducing them and giving up some non-essential items can help you save additional money.

Zero-based budget

Another type of family budget is a zero-based budget. In this case, you should see that your income minus your expenses in your bank account equals zero.

However, this does not mean there is no money left at the end of the month. Instead, it means that all the money you receive is allocated to different purposes.

Step 3: Track Your Spending

Constantly checking how much money is left in your bank account may be intimidating. To track your spending, you can choose from many different methods. You can use spreadsheets or budgeting apps that can help you analyze your bank statements. It is recommended to put in place a system for checking accounts and recording your family budget monthly.

Budgeting app or whichever method you choose, it should be convenient and easy for the whole family to track how much they spend throughout the month. This is an essential part of raising kids’ self-awareness, which may also lead them to have their budgets and to follow their spending habits in the future.

Tip: if budgeting is not something you feel comfortable with, it is always advisable to consult your personal finance expert.

Remember to involve your family in the budgeting process. Keep them informed about progress towards your financial goals. Regular budget tracking and adjustments can help your family achieve financial stability and long-term financial goals.

Step 4: Create goals together

The hard part is to stay motivated and stick to your family budget. So, before setting your family budget, it is recommended to sit down with your family and discuss your financial goals. Creating financial goals and budgeting together is a particularly great way to create motivation.

These goals can be short-term, such as saving for a family trip, or long-term. A long-term goal is a big purchase, such as buying a house. Once you have set your goals, select a certain amount of money you will set aside each month for that particular goal.

Remember, achieving saving goals is a family affair, which makes it crucial to involve kids in discussions about variable and fixed expenses and educate them about financial awareness.

What is a realistic household budget for a family of 5?

Each family and its needs are different, and the same budget may not be suitable. Family budgets depend on where they live, the age, ability to work, health, income, and spending of family members.

However, by considering these variables, each family can tailor their budgeting and tracking methods, divide the money they pay into seven budget categories, and plan for them by assessing which costs they can reduce and which they can avoid.

Ultimately, an appropriate five-member family budget allows the family to live comfortably and enjoy a reasonable standard of living while saving for the future and attaining the financial family’s goals.