Easy Steps To Creating A Family Budget

June 7, 2018

Creating a budget is a critical first step in taking control of your personal finances. I’ve talked to many individuals and families who are having trouble with their monthly spending, racking up debt, and paying high fees to banks for countless overdrafts and late payments. Every one of them say that they don’t want to create a budget because they don’t want to live their lives with so many restrictions. I don’t look at it that way. I see living under a budget as a liberating endeavor. For anyone like myself who likes to spend money on things that are not necessary, i.e. fashion, electronics, games, dining out; a budget frees you up to do those things – to make those purchases. Without a budget, you never really know if you can afford extra luxuries. At any given time of the month, you never really know where you are financially. By sticking to a well-planned budget, you can set aside a certain amount for luxuries, giving yourself the confidence to spend that money knowing you are still making the right decisions for your future.

So, how do you do it?

Creating a budget is easier today than it has been at any time in the past. Much of the financial transactions we create today are cashless which means they are more easily tracked compared to spending cash in the past. If you are willing to do it, online personal financial software such as YNAB or Mint.com will track your spending automatically and create budgets for you. Personally, though, I would rather you go through the steps of creating a budget manually, since that is what gives you the best overview of your spending habits and gives you the most control over your finances. Get out a piece of paper and a pencil and follow the steps below – or better yet, click below to download our convenient fillable budget sheet.

Download Our Free Family Budget Worksheet

Just fill in all of your expense and our budget worksheet will automatically calculate your monthly cash flow situation

Step 1: Your income.

The first step to creating a budget is to get a handle on how much you make.  Start with a full three months’ worth of pay statements. Add up the gross pay you made and divide by 3 to give you an average monthly amount you make. Please note, I’m not talking about your net take home pay, I’m talking about the gross pay. The reason? You can control many of the deductions that are subtracted from your pay check, so we will subtract those items out as we add up your expenses. For those who don’t get paid the same amount every month, such as those who work on commission, just take your annual gross pay and divide by 12 to get your average monthly pay. If you are not sure what your annual pay is, just look at your W-2. Income sources include:


  • Pay statements
  • Profit from business or consulting

Alternative Sources

  • Child support
  • Alimony
  • Annuity payouts
  • Other Income (regular gifts, side jobs, etc.)

Step 2: Subtract your automatic deductions.

Now, go back to your pay statements and write down the automatic deductions that are being subtracted. Remember, you want to list down monthly amounts, so I normally recommend adding every line item up for 3 months’ worth of pay statements and divide by 3. If you get paid twice a month, of course you can just take two statements and add them up. If some deduction occur occasionally, such as once a quarter, then divide them out to give you an average monthly expense. Some of the most common deductions you will see include:


  • Federal Income Tax
  • State Income Tax
  • Social Security contributions
  • Medicare contributions


  • Health Insurance
  • 401(k)/403(b) or other retirement plan contributions


  • Union Dues
  • Other (uniform fees, parking fees, etc)
Do not include things like flex spending plans as those expenses will be included in specific spending categories below.

Step 3: Subtract your living expenses.

Now begins the difficult part of budgeting. Steps 3 and 4 require you to get organized. You should get your finances organized anyway, so this is a good time to start. Get 3 months’ worth of checking and savings account and credit card statements and highlight each expense incurred. Living expenses are those expenses that you must pay to maintain your lifestyle; reducing these expenses requires quite a bit of thought and planning, such as changing the city you live in, or moving to a cheaper home. Think rent and car payments. If there are any expenses that you incur regularly but not monthly, you still want to include them as a monthly expense. For example, I used to pay $100 a quarter in association fees; I would add that in as a $34 monthly expense ($100 divided by 3). Begin to identify the monthly cost of the following:


  • Rent or mortgage payment
  • Condo or homeowner association fees
  • Homeowner’s, condo, or renter’s insurance
  • Electricity
  • Water and sewer
  • Maintenance and repair
  • Property tax


  • Vehicle loan payments
  • Automobile gasoline
  • Taxes & Registration
  • Parking & Tolls
  • Public transportation
  • Vehicle insurance


  • Life insurance
  • Healthcare and prescription drugs
  • Childcare
  • Tuition
  • Alimony/Child Support

Step 4: Subtract your variable monthly expenses

Variable expenses require a little guess work as they can vary widely from month to month, which is why I suggest gathering 3 months’ worth of account statements. Additionally, there will likely be a lot of overlap. For example, you spent $300 in bars over the last 3 months, is that under dining out or alcohol? It doesn’t really matter, just make sure you add it in somewhere and be careful not to double up. Add up your expenses incurred and divide by 3 to give you an average monthly expenditure. Expenses will likely include:


  • Groceries
  • Alcohol / Tobacco
  • Dining out


  • Personal Care
  • Household supplies
  • Cable/Internet/Phone/Cellphone
  • Clothing
  • Books / Magazines / Newspapers
  • Entertainment
  • Club dues and fees


  • Family Gifts
  • Church
  • Charity

Step 5: Subtract your investment contributions

Hopefully, you have already considered your retirement plan contributions in Step 2. Here, list any additional monthly contributions you are making or want to make to private retirement plans such as Roth IRAs or other investments you are or are planning to make in the next year. These may include:


  • IRA / Roth IRA contributions
  • Regular contributions to savings or brokerage accounts
  • 529 or other education funds
  • Other

Step 6: Debt service

Getting a good read on your debt service expenses can be a little tricky since, if you are in debt, much of it may have arisen from incurring the expenses already listed above. So, if you are putting your dining out expenses on your credit card but you are then paying off the balance every monthly, you don’t want to double up the dollar amount here. This section is meant to list the absolute minimum payments you have on debt that you have incurred due to past spending including:


  • Minimum payments on credit cards
  • Personal loans or other bank loan payments
  • Home Equity Loans
  • Student loan payments
  • Installment payment plans
  • Tax payments
  • Other

Step 7: Bring it all together

Add up your monthly expenses and subtract from your monthly income. Of course, if the result is a positive, then you are already doing a good job. Now you can look at increasing the amount you are contributing to retirement or saving. If you don’t own a home, I suggest saving for a down payment. If, though, your result is a negative, now you have the tools necessary to identify the problem area and fix it. Here’s a great example. I worked on budgeting with a single mother recently. She came to me with $36,000 in debt, which she claimed she incurred in the last 12 months and couldn’t figure out why it was happening. In her mind, she made a lot of money ($80,000 a year) and should have been able to live within her means. We went through every expense category and two-line items stood out right away. She was contributing $2,000 a month toward her daughter’s college tuition, and $1,000 a month to tithing. Both monthly expenses started about 12 month ago with her daughter starting school and she joined a new church. She has since stopped her charitable giving and had her daughter take out some student loans to fund school and with some additional spending cuts, she is on her way to reducing her debt. I realize most situations are not that straight forward, but with your budget in hand, you should be able to figure out where to reduce spending to get back on track. When I ran low on funds a few years back, I cut out dining out and most entertainment such as going to the movies. If those things are a priority for you, then look for somewhere else to reduce spending, such as your monthly clothing expense. Once your monthly spending is under control and you are in the positive, prioritize debt payments. Additionally, it is fine to reduce contributions to retirement plans if your goal is to reduce the amount of debt you have. In fact, I believe with a well thought out budget, you should ultimately set a goal of being completely debt free (not including a mortgage).