When you’re working hard to meet your life goals, developing a budget might not seem like the most pressing priority. But as part of a more comprehensive wealth management strategy, understanding how to create a family budget that works is a vital building block to your family’s successful financial future.
In addition to helping you to make the most prudent financial decisions today, it can help set you on the right track for a financially healthy tomorrow, and for your children’s tomorrows.
But since there’s no one-size-fits-all way to create a family budget, it’s essential to understand what the best approach is for you, your family and your goals. Here are our tips for getting it right.
The Importance of Family Budgets
In the simplest terms, a budget lets you know how much money your family has coming in and where that money goes when it leaves. By analyzing that income and expenditure and making decisions about what you do with money, you can set a strong foundation upon which to build a plan for your family’s future.
A solid budget is valuable for more than just keeping your financial goals on track. It can give you more freedom to take advantage of investment opportunities and focus on the most beneficial strategies to grow your wealth. It’s helpful in terms oflegacy planning and making the decisions that will strengthen the financial security of future generations of your family.
And, speaking of future generations, modeling good financial management to children helps set them up for success as well. Starting their financial education early and helping them understand the importance of budgeting is a great example to set, even from a young age.
How to Create a Budget That Works for Your Family
So how do you find the right way of budgeting for your unique needs and goals?
Step 1 - Pick your method
There are a number of different ways to create a family budget.
As part of our comprehensive process of working with clients to manage and grow their wealth, we created theMONEY Budgeting System. The system takes you through Make money, Obligations, Needs, Experiences, and Why (Y) are you spending this money?
M: To begin, you look at all your household income. Your ultimate financial goals rely on the money you have coming in, both the amount and what you do with it once you have it.
O: Those essential outgoings like rent/mortgage, debt repayments, and car finance come under obligations. Anything you’re committed to paying, usually on a monthly basis.
N: When we look at outgoings, it’s not always easy to differentiate between what we need and what we want. We need to spend money on food, for example, but whether that’s buying name brand groceries or high-end, luxury goods is somewhat of a gray area!
E: Experiences stand for the things that bring joy and meaning to your life. Hobbies, treats, and vacations could all come under this category.
Y: This is a great question to ask yourself about all of your expenses. You’ll always have expenses that don’t fit into the previous categories, and examining why you’re spending and whether it’s something that can be cut back in is a valuable budgeting step.
Step 2 - Create money goals together
Setting money goals with your family is a big help when it comes to successful budgeting. Knowing why you’re budgeting and what you’re budgeting for is a great incentive to stick to it, and sticking to a budget as a family is much easier when you set goals that benefit everyone.
In the short term, there might be a family purchase you all have in mind, perhaps electronics or a vacation. Other short-term goals might include building a bigger emergency fund or paying off a credit card. Longer-term goals might include being able to retire early, buying an investment property, or saving as much as possible for a younger family member’s college fund.
Plus, talking openly about money as a family is a great example for younger generations and helps set them up to be financially literate adults.
Step 3 - Track your progress
Once you’ve chosen your method, set your end goals, and started budgeting, you need to track your progress. It's hard to track your money decisions one at a time, which is why it's important to review your progress over a month, a quarter, or a year. This allows you to see where you might be spending more than you know on certain expenses (like eating out) and redirect your money to something more meaningful, like a vacation.
Look at what’s working, what isn’t, and whether there are things you can tweak to get to where you want to be sooner. You can adjust as needed if you have a month when your commitments are higher/lower than normal. As time goes on, any changes to your financial goals mean your budget will probably need to be adjusted to match.
Working Toward the Financial Future You Deserve
Whatever your family’s financial goals are and whatever stage you’re at in your financial journey, setting and sticking to a budget is a powerful driver for getting you to where you want to be. No matter what bumps in the road you come across, a solid budget and financial strategy can keep you on track.
If you think your family budget would benefit from an expert eye, or you have any questions about budgeting and wealth management, contact us today.