How to Create a Family Budget

What Is a Family Budget?

A family budget is a monthly spending plan that divides up your income into categories, which can be as specific or as general as you wish.

But it's not just about deciding how much you want to spend on takeout every month. It's also about proactively determining how much to save for retirement, college, emergencies and vacations—and how you plan to pay off any outstanding debt—and then making a practical plan for how to hit those targets.

How to Create a Family Budget

Here's how to start from scratch with a family budget.

1. Calculate Your Total Household Income

First, add up how much the working members of the family earn each month in total. This can include not just your regular paycheck, but also any alimony or child support, passive income from rental properties or investments, self-employment earnings and Social Security or other government benefits.

Even if you and your partner maintain separate bank accounts, living together and having a family will require combining some finances, such as paying for shared living expenses and working toward common goals. Start by understanding how much you each earn per month.

Tip: If you and/or your partner has irregular income or works freelance, take the average of what you bring home each month. You may need to build a buffer into your budget to avoid going over in lower-income months.

2. Choose a Budgeting Strategy

Next, consider how loose or prescriptive you'd like your budget to be. Here are some popular options:

• 50/30/20 budget: A good choice for beginners, the 50/30/20 budget requires following three simple guidelines: spending 50% or less of your after-tax income on necessities like housing and groceries, no more than 30% on wants like streaming services and travel, and at least 20% on savings and debt payments. It requires some upfront effort to split your spending into categories, but once you do, you won't have to regularly update a spreadsheet or app to stay on track.
• Zero-based budget: A more time-intensive method is zero-based budgeting, which requires giving every dollar a job. If you earn $3,000 net each month, you'll split that $3,000 across all spending and saving categories until you reach $0. That can help effectively limit spending. But it will also mean checking in often on your spending to make sure it aligns with your plan and adjusting your budget any time you spend more or less than expected in any category.
• Envelope budget, or cash stuffing: Similar to zero-based budgeting, envelope budgeting (also known as cash stuffing) requires you to set spending limits across multiple categories. The twist is that you'll put cash in an envelope assigned to each category at the start of the month to set a physical spending limit. A big drawback is that not every expense can be paid for with cash—you'll have to make loan and bill payments directly from your checking account, for example.
• Pay-yourself-first budget: One of the most flexible and simple budgeting options is to pay yourself first, or to set aside money for your savings and debt payoff goals first, then use the rest left in your checking account for all other expenses. You won't gain a clear understanding of your spending patterns unless you do a review of your expenses each month, but paying yourself first is an effective way to prioritize your family's most important medium- and long-term goals.

Learn more: Budgeting for Needs vs. Wants

3. Estimate Fixed and Variable Expenses

Many budgeting strategies expect you to categorize your expenses so you can get an overview of your current spending, then set limits for how much you want to spend in each category. Expenses can be fixed—such as rent or student loan payments—or variable, like credit card payments or entertainment.

Look at your credit card and bank account statements, and check if your credit card issuer or bank's online portals automatically split your expenses into categories. That can be a good jumping-off point. Make a spreadsheet or use a budgeting app and list each expense category, along with how much you're typically spending per month.

Don't forget irregular expenses like your car insurance premium, home maintenance, fluctuating utility bills and travel. You can use an average of these expenses to estimate their cost on a monthly basis, or plan to spend more in one category at certain points in the year.

4. Set Spending Limits

Here's where you'll take your budget from reality to your ideal state: Decide how much you wish to spend in each category. Use the budgeting plan you chose in step 2, and do the work of defining your goals according to the budget's guidelines. For example, if you decide to use the 50/30/20 rule, you'll set an overall limit for the "wants" category—and as a result, you'll likely need to identify expenses you can reduce or eliminate altogether.

Some couples choose to keep at least a portion of their finances separate. For example, you can use a combined checking account to pay for shared expenses but maintain separate savings accounts for your own hobbies and personal care spending. If you do so, you can plan to contribute to shared expense categories and goals but agree to leave whatever is left over to each partner's own discretion.

5. Make a Debt Payoff Plan

To start making a debt payoff plan, start with a transparent discussion about all debt each partner has outstanding, from credit cards to student loans to gambling debt. Then decide on the relative importance of getting rid of each type. High-interest debt like credit card debt and payday loans, for example, is likely the most urgent, since it's the most costly.

Some budgeting systems, like the 50/30/20 plan, account for extra debt payments as its own spending category. You can decide how much each partner puts toward debt payments beyond the minimum each month, and whether you'll each help the other pay down debts incurred before marriage.

Tip: Couples need to decide how to handle their debts together. By law, debt from before marriage stays yours. How debt you incur during marriage is legally handled depends on whether you live in a common-law or community property state. You're both responsible for jointly owned debt no matter where you live.

6. Emphasize Saving

A big benefit of intentionally setting a family budget is determining how much you need to save in order to reach your shared goals. These can include:

• Retiring at a certain age or with a certain amount of money
• Saving for your children's college educations
• Investing
• Buying a first home, an investment property or a vacation home
• Taking regular vacations
• Remodeling your home
• Buying a new car
• Building a sufficient emergency fund

Figuring out how much to save for each goal is a feat in and of itself. For each, discuss what you envision for the future and how much total you'll need to get there, then break that up into monthly increments. You don't need to save for every goal simultaneously, though some—such as retirement and college—benefit significantly from early, consistent saving due to the effect of compound interest.

7. Plan for Emergencies

One of the most important family savings goals is a sizable emergency fund that can keep you afloat if one of you loses your job or you need to pay for an emergency home repair or medical bill. Experts recommend having three to six months' worth of basic family expenses set aside; if you have kids or little support from extended family, try for at least six months' worth, if not more.

Building up or rebuilding an emergency fund takes time, and should be considered a line item in your budget for as long as it takes to reach your goal. Plan to keep the money in an accessible savings account that also earns as much interest as possible, such as a high-yield savings account.

8. Allow for Discretionary Spending

Don't forget to save regularly for the things your family enjoys, like vacations, classes you take together and birthday gifts, plus for discretionary expenses that are important to each partner individually.

It's up to you how much to set aside for these items, but using the 50/30/20 plan as a guideline, it shouldn't be more than 30% of your net income—less if you live in a high-cost area that forces you to spend more than 50% of your combined take-home pay on necessities.

Tips for Maintaining a Successful Family Budget

To keep your family budget working for you, use these tips:

• Check in regularly. Schedule a time, perhaps once a month, to sit down with your partner and evaluate how the budget is working. Review whether you're sticking to your spending limits, if any categories should be added or removed or if there's another type of budget that might work better.
• Stay transparent. Talking about money can put partners in a vulnerable position, especially when one partner has more debt, earns a lower income or comes from a family where money wasn't discussed. But ultimately reaching your goal—like sitting on Adirondack chairs in retirement, looking out at the water from your lake house—requires trust, as well as clarity about what you want to achieve and how it's going.
• Celebrate big and small wins. Give yourself the opportunity to feel proud of every milestone, from the first month of sticking to your spending limits to the last transfer to your child's college fund. If you have kids, explain to them your budget and savings plans and encourage them to celebrate with you.

The Bottom Line

A budget is a necessary part of family life, no matter how strictly or loosely defined it is. The most useful part of budgeting is the conversations you'll have—maybe for the first time—about what you want for your future, and what changes you need to make to attain those goals.

Like life, a family budget is dynamic. Revisit it every time there's a change to your income, your family structure—such as a new baby or an empty nest—or you realize it's not as realistic or as restrictive as you'd hoped.