Creating a household budget is not only helpful but also necessary for managing a family’s finances. By creating a budget and making sure your family’s expenses do not exceed your income, you can better safeguard yourself from getting into debt and other financial trouble.  

Here are four simple steps to help you and your family create a household budget:

Calculate Both Your Gross and Net Monthly Income

Gross Monthly Take-Home Pay: Calculate your gross monthly pay, which is effectively your total salary, before accounting for deductions like payroll taxes, federal income tax withholding, health insurance premiums, and 401(k) contributions.

For example, if a dual-income household has two parents, and one parent earns $60,000 per year and the other $72,000 per year, their combined gross household income is $132,000 per year, or $11,000 per month.

The employer withholds deductions from the employee’s paychecks. The employer transfers the net paycheck to the employee’s bank account.

It’s essential to track your gross pay and deductions from your paycheck to ensure all those deductions are accurate. In addition, some of those deductions may result in your receiving a tax refund at the end of the year.

For example, the federal income tax withholding from your paycheck is credited against the taxes you owe at the end of the year when preparing your Form 1040 (US Individual Income Tax Return). If you have too much federal withholding tax taken from your paycheck, you may receive a federal tax refund, increasing your tax-home pay for that month.

Monthly Take-Home Pay: Your monthly take-home pay is the net paycheck deposited into your bank account. The net paycheck is your gross income minus all of the deductions withheld by your employer.

For example, if an individual’s gross yearly salary is $60,000 per year ($5,000 per month), their net monthly paycheck deposited into their bank account may only be $4,207.50. So, what accounts for the difference?

Here’s a sample calculation of the various deductions:

  • Employee Social Security Tax 6.2%: $310
  • Employee Medicare Tax 1.45%: $72.50
  • Federal Income Tax Withheld: $250
  • Employee Share of Health Insurance: $40
  • Employee 401(k) Contributions: $120

Once all those deductions are totaled, the employer subtracts the $792.50 from the employee’s gross monthly check of $5,000. The employer transfers the net $4,207.50 to the employee’s bank account.

List Your Fixed Monthly Expenses

Each household should identify its fixed monthly expenses. A fixed monthly cost is an amount that must be paid each month and is generally the same. However, some fixed monthly expenses can fluctuate slightly.

Fixed expenses for a household with children may include the following:

  • Rent or Mortgage Payments
  • Homeowners’ Insurance
  • Property Taxes
  • Utilities (electric, gas, water, phone, internet, etc.)
  • Car payments, car insurance, gas, regular maintenance
  • Life insurance premiums
  • Childcare, daycare, and afterschool programs

The total of these fixed costs will give you a general idea of how much money remains for variable expenses, savings, retirement, and emergency fund contributions.

Estimate Variable Monthly Expenses

After identifying your fixed monthly expenses, the household identifies its variable monthly expenses. Variable costs change monthly and are primarily driven by volume or consumption.

For example, a family’s grocery expenses are variable because the cost will depend on how much food they eat at home each month. If a family eats more at home than dining out, their monthly grocery bill may increase.

Other factors significantly impacting a family’s grocery bill include inflation, rising food costs, the quality of food products purchased, and how well the family takes advantage of sales discounts and coupons.

A sample list of variable monthly costs may include the following:

  • Groceries: $1,100 to $1,300
  • Dining Out: $150 to $250
  • Movie Theatre: $120
  • Mini Golf: $150
  • Clothing: $900
  • Miscellaneous Household Items: $900 to $1,000

All of these expenses will fluctuate from month to month.

For example, a family may budget for mini-golf entertainment for one month and then not go mini-golfing at all for the next few months. The family may eat at home the majority of the time and only budget for one lunch out per month.

Because the variable costs can change and fluctuate, a family should track these costs for at least six months to get a better average monthly cost.

Set Savings Goals and an Emergency Fund

Be disciplined to save money for retirement and create and maintain an emergency savings fund.

Retirement Savings: The power of compound interest is real when saving money and investing. The earlier you save, the greater your return on investment (ROI). Many professionals estimate you should save 10% to 15% of your income.  

Decide how much you want to save each month for short-term and long-term goals. Maximize the contribution to your retirement accounts, which include the employer-sponsored 401(k) plan and your individual retirement account (IRA).

Emergency Fund: An individual or a family should aim to save 3-6 months’ worth of living expenses, which cover both fixed and variable monthly costs.

Education Fund: Consider saving for your children’s future college education using Section 529 Savings Plans. These are tax-advantaged plans that allow parents to contribute funds that grow tax-free.  

Conclusion

Creating and maintaining a budget for a family household requires careful planning and regular monitoring. Following these steps lets you sleep at night, knowing your family’s financial resources are secure.