Having a budget is essential to achieving your financial goals. Whether it’s to save for retirement, your kids’ college education or cutting down on monthly expenses, knowing how much cash you bring in and spend helps a lot. In this article, I’ll go through some useful budget tips for families and couples who are looking to stretch their incomes and savings.
Making a budget can be intimidating. If you have a gut feeling that your finances aren’t in the best shape, doing your budget can be downright frightening because it puts your fears into reality.
That said, your budget is your friend. And, if you treat it with care, it will help you get out of debt, save extra money and allow you get out of living paycheck to paycheck.
So, if budgeting is something that you want to try or get better at, here are some tips I’ve learned to help make it more effective for you.
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Know Exactly What Your Current Financial Situation Looks Like
The first step to budgeting is to take a long hard look at your current financial status. Where you stand lets you figure out what the most important things you should be prioritizing.
And, it lets you decide which goals are realistic and practical at this given moment.
Here are 2 easy steps you can take go get a clear picture of your current financial standing.
1. Know Your Current Cash Inflow and Outflow Sources
Step 1 involves getting to know where your money comes from and where it is going. To do this, you’ll need to list down all you’re your cash inflows and outflows.
You can use a piece of paper to note everything down. But I’ve found that it’s easier to use a spreadsheet like Microsoft Excel because you can easily rearrange the items and change the numeric figures. Plus, spreadsheets can also automatically calculate sums.
Your Cash Inflows
Simply put, your cash inflow is anything that comes into your wallet or bank account. This includes your salary, bonuses, pension and tips. Here are a few things that may apply to you.
- Child support or alimony
The goal here is to list them all down. Beside each income source, enter the amount you receive. In some cases, like commissions and tips, the amount can fluctuate.
Here, you have two options.
- Option 1: use the average of the past 3 or 6 months. This will give you some kind of estimate.
- Option 2: use both high and low estimates. Using both your high and low amounts lets you do something of a “if it’s a good month, I can expect this,” and “if it’s a bad month, this is what I’ll get”. Doing this lets you see both sides of the spectrum. But, do put more weight on the LOW ESTIMATE. This lets you be more conservative in your budgeting.
Important Note: When it comes to estimating your income or cash inflows, always err on the side of caution. That is, it’s better to UNDERESTIMATE YOUR INCOME rather than overestimate it. This is why I mentioned using the lower estimate when using both high and low earnings. It may feel like a downer. But, it saves you from getting into a financial bind because you’re taking a more conservative stand.
Your Cash Outflows
Your cash outflows are the opposite of your inflows. They consist of everything you spend. Basically, any money that leaves your hands, even the most trivial ones. Count all of them. This includes shopping for groceries, paying the bills and rent payments.
Similarly, don’t forget to count the money that you give your kids for allowance or the tip you left your server. Those count as expenses too. After all, you parted with your money.
Here are other some other common expenses.
- Grocery bill
- Gas and transportation expenses
- Electricity, Water and other bills
- Home repairs maintenance
- Cost for laundry
- Medical bills and medications
- Tuition and School fees
- Other things you pay for
Technically, this section falls under cash outflows or expenses. But, from my experience, it’s a good idea to separate your spending money from the money that you use to pay for necessities.
Notice that the items listed above are all essentials. You need them to live, whether for food, shelter, safety and health.
But, there’s also discretionary spending. That is, money that’s free for you to use however you want. In most cases the cash is used for things YOU WANT. And, not necessarily things YOU NEED.
Things like eating out, vacations and new shoes are all useful. But, they aren’t essential. Yet, they make life enjoyable and worth living.
Some common examples of items you spend your discretionary income are include:
- Cell phone bill
- Clothes and shoes
- Going shopping
- Trips, travel and vacation
- Eating out or ordering in
- Entertainment including movies and visiting Disneyland
- Other fun activities
The reason it’s a good idea to separate your discretionary expenses from your necessities is because it makes it easier to find them later.
If you go over budget, you can quickly head on over to your discretionary expense first to see which you can cut down on.
Since they’re non-essentials, they’re the top candidates for slashing. Albeit, not the most fun to get rid of.
Finally, there’s your debt. Here, your goal is to list down all your debt and loans. Any type of borrowing you may have that needs to be repaid.
At the top of this list is your mortgage, if you own a house. If you have a mortgage, then you probably won’t have rent, so that item isn’t present in the expenses but will be under mortgages here in the debt category instead.
Beyond your mortgage, there are other types of debt you may have. Some common examples include:
- Credit card debt
- Student loans
- Car loans
- Personal loans
- Medical debt
- Child support and alimony
In step 1, the goal is to be as thorough as possible. The more comprehensive your list, the more accurate you’ll be able to budget.
It helps to pull together all your statements, bills, receipts and online forms to get all the data together. While it’s a bit tedious to do, it’s well worth it because when you’re done, you’ll have a very clear picture of the state of your finances are.
2. Debt to Income Ratio
Once you have everything done in Step 1, it’s time to move on to Step 2.
This step is very important especially if you have debt and are struggling to cover all your expenses and payments each month.
This will help you get an idea of why you’re having trouble covering your costs. And, what you can do about it.
What is Debt to Income Ratio?
Debt to Income Ratio or DTI ratio is simply all your monthly debt payments divided by your total monthly gross (pre-tax/deductions) income.
What this basically tells you is: What percentage of your monthly income is used for paying off debt.
In short, how much, in percent, of your hard earn money can’t you enjoy. Because, you need to use that amount to pay off your loans.
Why Do You Need to Know Your Debt to Income Ratio?
Your Debt to Income Ratio is important because it tells you a few things:
- Your DTI ratio gives you an idea if you’re spending too much on your debt. A high debt to income ratio means you’re basically working to pay off your debt. A low DTI ratio means, only a small chunk of your earnings go to paying off debt. So, you can enjoy your hard-earned cash better.
- More importantly, your DTI ratio tells you whether you’re in over your head or close to it. Remember, your DTI ratio takes into consideration your gross income. That means, the federal government and the state will still take taxes from it. Plus, there are other deductions too. Thus, your take home pay will be less than your gross income. If your DTI ratio is 70% or above, it’s very likely that your take home pay won’t be enough to cover your debt payments, much less your day to day expenses. So, it’s important to take immediate action.
- Finally, mortgage lenders and other borrowers use your debt to income ratio to assess your loan application. It basically gives them a good idea if you can cover additional debt payments. A high DTI ratio makes them less likely to lend you money, be it for a home, car or anything else. It may also cause them to reduce the amount they’re willing to lend you or charge higher interest rates because they’re carrying more risk by lending you money.
Now, items 2 & 3 may sound scary if you have a high debt to income ratio.
But, don’t be. Instead, they’re your early warning signs.
Knowing that you have a high DTI ratio means you can fix it, which we’ll go to later in the article. The good news is, once you start going, you’ll quickly see the ratio turn in your favor within a matter of months.
How to Calculate Your Debt to Income Ratio
Now, let’s get to calculating your debt to income ratio.
Step 1: List and add up all your debt and interest payments for the month.
This should be easy because you’ve already done your work above in the debt section.
To recap, pull together all your loan and debt payment statements. Use the online forms, letters you receive or printouts. The goal is to be as complete and thorough as possible.
Next, list down all your debt including:
- Mortgage or rent
- Credit card payments
- Student loan payments
- Car loan payments
- All other debt payments
Finally get their total. This is the first part of the equation: the DEBT part.
Step 2: List and add up all your income sources
Again, this should be fairly quick since you’ve already done the leg work above in the income/incoming cash flow section.
This will be the second part of the equation: the INCOME part.
Step 3: Calculate your Debt to Income Ratio
- From step 1: Add all your debt
- From step 2: Add all your income
Now, divide your total debt by your total income. (Step 1 divided by Step 2)
If for example, you only owe rent and credit card debt. And, you pay $800 in rent and have a $300 balance from all your credit cards. Thus, your total debt is $1,100.
If your total gross monthly income is $3,000, then your DTI ratio is $1,100 / $3,000 = 0.3666. in percentage form that’s 36.66% or 0.36666 x 100.
So, your Debt to Income Ratio is 36.66%
What’s a Good Debt to Income Ratio? And What Your DTI Ratio Means
So, if you have a DTI ratio of 36%, it means that a little over a third of your gross earnings every month goes to paying off debt and interest that comes from those debt.
In general, a DTI ration of 36% or less is a good level to shoot for. As a side note, I didn’t mean for the result in the example to hit the exact level but it somehow just did.
The reason that 36% works for most people is that you have enough money to pay for your debt obligations each month. Plus, you have extra cash for household expenses and some discretionary spending as well.
In general, most lenders will start seeing the red flag when your DTI ratio goes over 43%. Together with your credit score and history, your DTI ratio are major factors on whether your loans are approved.
For your personal budgeting purposes, here’s what to make of your debt to income ratio.
|Debt to Income Ratio||Status||Action Plan|
|35% or lower||You’re Doing Good||You have enough earnings to cover your monthly debt. Just keep doing what you’re doing.|
|36% to 49%||Try to Make Some Improvements||You’re currently doing okay. But, try to get your DTI ratio in the lower half of the range or under 36%. This keeps you safe in case unexpected expenses or emergencies come up.|
|50% or above||You Need to Take Action||You need to take immediate action to lower your DTI ratio. This gives you a better chance of borrowing money in the future. And, it lets you take care of any unforeseen expenses that arise.|
When it comes to improving your debt to income ratio, it comes down to two things.
- Increasing your earnings. This will help bring in more cash to cover your debt and expenses.
- Paying off debt faster. This lowers your upcoming monthly debt payments. So, even if you don’t increase your earnings, you’ll have more cash left because you’re paying less towards debt and interest.
- Do both. Augmenting your earnings and paying off some debt helps on both sides.
What are Your Family’s Financial Goals (and Ways You Plan on Achieving Them)
Now that you have a good idea of how you stand financially, you can chart out your goals.
For this part, list down your goals and ways you plan to achieve them. The latter is just as important as the goals themselves, as they give you a clearer idea of how you can reach each of those goals.
Knowing how you can achieve your goals is just as important as the goals itself because they let you know if your goals are realistic and practical or not.
Here are a few examples of goals.
- Save for vacation to Italy
- Pay off all your credit cards
- Create an emergency fund
Try to be as specific as possible. This way, you know what you’re after and can plan on how to achieve them.
When it comes to your goals, you can go 2 ways.
- Simple goals. Choose 5 main goals. When you achieve one, add a new goal to keep the number of goals at 5. Keep going until you’ve completed all the things you want financially. And, are finally financially secure and independent.
- Short term, Medium term and Long term goals. For each list 3 to 5 main goals. You can separate this in many ways. One good division is:
- 6-12 months for your short term goals
- 3-5 years for your medium term goals
- More than 5 years for your long term goals
Understand the Difference Between Needs and Wants
At some point in creating or adjusting your budget, you’ll need to start cutting some items. Often this will be your expenses.
To make things easier, it’s a good idea to identify which of your expenses are WANTS and NEEDS.
This allows you to spend money wisely. And, if needed start cutting costs in the WANTS items first.
Always Budget to Zero Before the Month Starts (That’s Your #1 Goal)
When it comes to your monthly expenses, the goal is to budget to zero. That is, your total monthly earnings minus your total expenses and debt payments should at least be equal to zero.
That means you’re bringing in enough cash to cover all your costs and debt obligations.
In an ideal world, you’ll end up with a positive number. That means your earnings are more than the sum of your expenses and debt.
That gives you extra cash to put into savings or investments.
Don’t Be Afraid to Keep Adjusting Till You Get There
One of the common misconceptions about budgeting is that you only get one crack at it.
The reality is, your budget is a dynamic thing. It keeps evolving as you and your family evolve.
So, you shouldn’t be afraid to keep adjusting it until you get a budget that will give you the best result (and most savings). It’s not an accounting exam or a math test. So, you get to make as many do-overs as you need to get the right result.
You first goal is to budget to zero. That is, slowly keep adjusting the spending until your monthly income covers all your expenses and debt payments. It doesn’t matter how many tries you need to do, just get there.
Once you get there, you can slowly improve your budget in order to squeeze out some savings. This lets you save up for your retirement or any other long term goals.
Be Realistic With Your Goals and Estimates
Always be realistic with your budget. That means, don’t over estimate your income. And, don’t underestimate your expenses.
Similarly, be careful not to cut too much off your budget that your quality of life suffers. You want to save money and live a debt free life without being miserable in the process.
So, it’s important to find balance between saving money for the future and still having a lifestyle you enjoy.
Add 10% to Your Estimated Expenses and Place it as Miscellaneous
One of the things about expenses is that they sometimes have a way of coming out of nowhere. This is why it’s important to set aside some money for unforeseen expenses.
Things like your car breaking down or your roof needing repairs can suddenly happen. When they do, you want to have extra cash that’s allotted for these situations.
If nothing happens, then just carry over that amount to the next month.
Track All Your Expenses Religiously
One of the best ways to keep your budget accurate is by tracking your expenses religiously. I’ll admit, this does take a bit of getting used to in the beginning.
But once you get the hang of it, you’ll realize how valuable it is in helping you stay in budget.
Here are a few ways I’ve tried that work well.
- Use a notebook. This is the one I stick with. I always have a pocket-sized notebook or small pad paper with me wherever I go. It lets me keep a to do list, reminders, ideas and track my expenses. Once I get home, I put them all together into a calendar which makes it easy to see how much I spend on a daily, weekly and monthly basis.
- Use an app. Budgeting apps work just as well. They let you track spending or set a monthly budget. Whenever you buy something, you’ll be able to immediately see how much you’ve spent or have left to spend for the month to stay in budget.
View Each Month is a Chance to Review and Adjust Your Spending Habits
Ideally, you’ll be updating your budget before the start of each month. This gives you a good idea of what to expect and how much cash to allocate for each item.
When you do so, try to keep improving your budget. Think of it as a work in progress that never ends.
That is, try to keep optimizing it so that you save the most money you can without cramping your lifestyle. It’s also a chance to assess your spending and see which expenses can be slashed.
Start With the Most Important Categories
When it comes to deciding how much to spend on what item, your expenses are often the trickiest. Savings is usually fixed between 10-20%. Debt is likewise fixed or the amount you owe is shown in your statement.
But, when it comes to expenses, you need to decide how much to allocate for each item.
As a rule, start with the most important categories. These are food, shelter, transportation and utilities.
|Rent or Mortgage|
Home Repairs & Maintenance
Any housing fees
Bus, Train Fare
Gas and Oil
Repairs & Maintenance
Parking and Toll fees
Water & Sewer
If You Don’t Know Where to Start, Use the 50/20/30 Plan
Creating a budget may seem daunting especially in the beginning. That’s because there are so many things involved.
One simple way to make budgeting for beginners much easier is to follow the 50/20/30 Plan. Here,
- 50% of your income goes to your needs or essentials
- 20% goes to savings
- 30% goes to your wants or non-essentials but things that suit your lifestyle.
This gives you a simple guideline to remember. And, a good starting point for figuring out how much to allocate for each category.
Pay Off Whatever Debt You Can
Whenever you have extra cash on hand, always use it to pay off debt first. The reason why debt is a priority is because it keeps increasing.
All your loans come with an interest or APR. This means that the longer you hold your loans, the more money you end up spending to pay them off later on.
That’s because the interest keeps piling up by the day.
So, paying them early saves you the extra cost of interest that can accumulate over time.
Pay Your Credit Card Bill in Full
Your credit cards have the highest interest rate among all your debt. If you look at the APR, you’ll quickly realize how much higher it is compared to your student loans, mortgage or car loan.
That’s why it’s important to always pay your credit card bill in full.
The other option is not to use your credit card unless you’re 100% sure you can pay for the entire amount.
Credit cards will often tell you to make the minimum payment. The truth is, you need to pay the ENTIRE BALANCE.
Otherwise, whatever amount that’s left there will be charged the APR. What’s worse, that amount gets compounded every day.
That means each day you don’t pay the balance, it increases. Thus, costing you more in the long term.
Save at Least 20% of Your Monthly Pay
The goal of budgeting, cutting expenses, saving and making money is so you can pay yourself. That is, you’ll be able to use the money to take care of you later on. This can come in the form of vacation time, buying something you’ve wanted to get for a while or retirement.
One way to put yourself first it to make sure that part of your monthly paycheck goes into your savings account.
From my experience, automating it via direct deposit is the best way to go. That’s because you never see the money. So, there’s less chance of you spending it.
Instead, it is immediately put into your savings account for safekeeping.
Make Your Money Work for You
This is probably the simplest way to make extra money. You don’t need to do anything once you’ve got it set up.
If you have any savings, make sure it isn’t sitting in your bank savings account doing nothing, ie. earning zero interest. Move it to a money market account or a savings account that pays high interest rates.
This lets it earn interest without you having to do anything.
How Much Should You Have in Your Emergency Fund?
An emergency fund is cash you set aside in case of emergency situations. So, if any unforeseen circumstances arise, you’ll have money to cover them.
Emergency funds are very important, and you need to have them. This keeps you safe in case of an accident, hospitalization or your car breaks down.
Similarly, you can turn to your emergency fund if you lose your job or a family member needs to pay medical bills.
The problem with emergencies is you never know when they happen. And setting aside money may seem like it’s not doing anything. But in reality, it’s there to help you out when you need it most.
Ideally, try to keep 6 months of living expenses as your emergency fund. Keeping this amount in a high interest saving account lets withdraw it anytime and earn interest in the meantime.
Assess You Living Arrangements
Rent or mortgages is often the biggest expense you’ll have. Your home is often the biggest investment you’ll make in your life.
So, it makes sense to make sure you’re not overspending for it.
If you’re trying to cut down debt or saving up for the future, it’s a good idea to figure out if you can save money from your current housing accommodations.
Moving to a smaller, cheaper home saves you on rent or mortgage. If you don’t like giving up space, you can move to a more affordable part of town. Sometimes, just moving a few blocks away can significantly affect the amount you spend on rent.
Do You Really Need a Car?
Having car is very convenient. But, it also costs more than commuting.
That said, depending on where you live, you may or may not have an option. In some places, commuting isn’t a good option because of the hassle, stress and inconsistency of public transportation.
If you do choose to drive, do consider a few things to help you save money.
- Choose a practical, economical car instead of a flashy one you want to show off. Not only is it cheaper, it’s also easier and more cost-effective to maintain.
- Consider parking and parking fees.
- Buy used instead of new to save money.
- Be aware that cars depreciate. Unlike homes, they don’t go up in value as time passes.
- Consider fuel efficiency.
- Do some research on how much your car’s insurance will likely cost.
Pay in Cash When Buying Things
Instead of using your credit card, try paying in cash. This makes sure you’ll never incur credit card debt which can snowball quickly because of its high interest rate.
When you pay with cash, you’ll also only be able to buy things you can afford. It won’t let you spend more than the money you have. That eliminates the possibility of racking up debt.
You Can Use Your Credit Card Initially to Help You Track All Your Expenses
If you have a hard time keeping track of your expenses, your credit card or debt card can help. Both will provide you with statements at the end of your monthly cycle. This lets you easily check and track your spending.
It’s an easy way to keep accurate records without having to write down everything you buy.
But, while convenient, do use this tactic with caution.
Using your credit card often can be tempting because you have your entire credit limit to spend. If you have more than one credit card, it may tempt you to use a few of them which compounds your spending and increases your risk of creating a mound of credit card debt.
Use an App If It Helps
My choice of budget software is Microsoft Excel. That’s probably because I’m used to using spreadsheets at work.
But, MS Excel isn’t the only software you can use for budgeting. If you like to use your phone more than your laptop, try budgeting apps like Mint, You Need a Budget and Wally.
- Mint lets you connect to your account in order to stay on top of your financials.
- You Need a Budget costs $6.99/month that lets you easily keep track of your budget.
- Wally is another free app that makes it easy to track your spending.
Budget Tips for Families
In the first section of the article, you went through the main components of your family budget. Basically, this is made up of 3 main components.
- Earnings or cash coming in
- Expenses and spending
- Debt payments
Because your budget is basically your earnings minus your expenses and debt payments, adjusting one or more of these components lets you improve your budget to produce more savings.
So, you can do one or all of these:
- Make more money
- Cut spending and reduce expenses when possible
- Pay off your debt faster. Paying this off quickly reduces the amount of interest that adds to the balance. It also reduces the amount of cash you need to allocate for debt payments on a monthly basis. This helps free up more of your monthly income for other things.
Here are some great ways to achieve of these goals.
Making Extra Money
Your goal here is to find ways to earn extra income. You can try some of these ideas to boost next month’s income.
- Start a blog
- Do freelance work like writing, proofreading, copywriting, graphics design
- Be a virtual assistant
- Part time job
- Get paid by filling out online surveys
- Do small gigs
- Sell things you make like arts & crafts or your own products
- Take advantage of cash back programs
- Rend out extra space
- Start a side business
- Switch to higher interest rates accounts
- Invest your savings in money market accounts or the stock market
- Sell old things or those you don’t need anymore
Here are some ways to reduce expenses and save extra cash.
- Take care of yourself so you spend less on health costs
- Live within your means
- Conserve energy and water at home
- Plan your meals
- Plan before going to the grocery or shopping
- Look for free or cheap ways to have fun
- Drive or ride a train instead of fly when traveling
- Cancel subscriptions you don’t need
- Join customer rewards programs
- Use coupons
- Make things instead of buying them
Finally, here are some tips to help pay off debt faster.
- Pay off debt one at a time. People who pay off one debt at a time instead of trying to pay off all their debt at the same time had better success.
- Stop taking on new debt
- Ask your lenders for lower interest rates
- Increase your monthly payments
- Stop paying just the minimum
- Put extra cash you receive towards debt payment
Over to You
So there you have them, a few of the budgeting tips for families and couples that will help you save more money.
In the comments below, I’d love to hear how you budget for your family.