Through budgeting, family members agree on a plan for income, expenses, and savings. The family budget is important for everyone to only spend money within the plan’s limits. This prevents overspending and keeps family finances balanced.
One important attribute of a good family budget is transparency. Communicating income levels and spending budgets as well as the decisions behind those keeps the peace in the family and educates children about solid finances.
What is a family budget?
As a family with joint finances, you want to budget your income and expenses together. Your family’s budget is a document that lists:
- All income, such as salaries, social security, business income
- All expenses for housing, utilities, food, clothing, insurance, transportation, pets, entertainment, and anything else you spend money on
- All savings that go towards your financial goals, such as buying a car, a house, or saving for retirement
It is important to jointly plan the family budget. Because you want to have an agreement between all adults in the family on the financial goals. You want to further agree on which financial goals you are saving for first.
For example, one family might decide to eliminate credit card debt first and then save for an emergency fund. Another family may find it important to save enough for retirement and at the same time for the car that needs replacement.
It is important that you put the budget in writing. For once it holds everyone accountable to the agreement, but you also need to check each month if your spending does occur according to the plan.
If you have a family budget, let also the kids know about it. Kids can’t have enough toys or entertainment. They have no limit on spending money. They are still learning about how to earn and spend money. Talking about the family’s budget is an important conversation to have with your kids. This way you can shape their beliefs about money and teach them the value of frugality and freedom that budgeting money can bring.
4 major benefits of budgeting for families
Creating and maintaining a budget is some extra work. Often the hardest work is to gain agreement on the allocation of funds towards individual goals.
Peace of mind
With a budgeting plan, every member of the family knows how much the family can spend on “want to have” items. You can set an allowance for each person to personally spend freely and without regret. Anything above that monthly allowance needs to be spent on a category that benefits the entire family.
Achieving financial goals
If you plan your finances together, you can achieve your financial goals. Not only can you achieve them, but you also know how much to contribute towards each of the goals and when you will reach the goal.
You can even backtrack and set a goal first, then determine how much you need to save for this goal each month. Let’s say you plan to buy a car for your teenager, once she comes into driving age. You can determine how much you want to spend on that extra car (purchase price, insurance, gas) and plan in advance how that impacts your finances.
Security in retirement
One of the most important savings goals is supplemental income in retirement. Most working adults pay into social security. However, social security benefits might be much lower than your current spending on living expenses. For a comfortable retirement, you need to save and invest money to have the desired income levels, when you won’t work anymore.
Insurance against divorce
A recent study about financial issues and divorce suggests “that financial disagreements are stronger predictors of divorce relative to other common marital disagreements.”
Marriage and building a family has a big impact on finances. A budgeting process should keep the couple in conversation about goals and how money plays into them. There may be many other reasons why marriages fall apart but may find a reflection in money disagreements.
Differences between family budget and personal budget
Living single or managing one’s own money also needs a budget. However, as a single person, you have the luxury to make your own decisions and do not need to compromise with others.
In a family, there are usually two or more adults and some children who depend on the same income. As they jointly depend on that income, they should also jointly decide how to budget the income so that all financial needs and goals are met.
Modern families often have dual incomes and many still struggle to make ends meet. A family budget is a perfect vehicle to have the necessary conversations about what goals are important and if the family gets financially ahead.
Managing family finances
Family finances are more complex because of multiple income streams and more goals that need to be achieved.
In many families, one member of the household manages the bills and everything related to money. Some couples keep their individual incomes and bank account, then contribute to a joint budget for joint expenses. This leads to my money, your money conversations, which sometimes lead to strife and disagreements.
An alternative approach is to have all income flow into one account and to budget individual needs out of this joint account. This kind of arrangement requires trust and conversation so that everyone will adhere to the spending plan. It also requires jointly to increase one’s financial literacy.
Beyond budgeting, there are investments of funds saved for retirement. Such investments can be held in a joint account or put into individual accounts for each adult covered by the retirements savings. The latter approach empowers both spouses to make their own decisions about their retirement money.
Family budget types
There are three types of family budgets:
- Deficit budget; Where expenses are greater than income
- Surplus budget; Where expenses are less than income, leaving an unplanned amount for savings
- Balanced budget; Where expenses + savings = income
If your budget is a deficit budget you need to take measures to reduce expenses or increase income to bring your budget to a different type.
A surplus budget sounds great, but it is not the most desired type. Because you don’t have planned savings. Without planned savings, you can not predict when you will reach your financial goals. Especially in a family, it is an important motivator to predict when goals can be reached.
A balanced budget gives the best peace of mind. It requires discipline to follow the process, but its rewards are more valuable than the effort.
Importance of a family budget
Creating a family budget is an important process because it fosters conversations and agreement about financial goals. A family budget brings clarity among family members about income, expenses, and savings priorities. Budgeting is essential to managing a family’s money.
Having a family budget is one of the best ways to teach children how to manage money. Schools do teach only little financial literacy and it stays in the abstract. However, children learn their money beliefs by the example of their parents.