Next, tally all of your expenses for the month. You can review your bank statements to make sure everything is accounted for, including your fixed and variable expenses, as well as discretionary spending and payments on outstanding debts.
- Fixed expenses: Bills that occur every month and for the same amount are called fixed expenses. These include things like your rent or mortgage, insurance premiums, daycare, and child support or alimony that you owe to an ex-spouse. Generally, this part of your budget is set-it-and-forget-it, since fixed expenses don't change. If you have any expenses that occur quarterly, annually, or on a schedule other than monthly, simply divide the total by the number of months in each billing cycle. For example, say you pay your car insurance bill of $500 every six months. You'd enter “=500/6" in that cell to get your monthly average (just be sure to set aside those funds for when the bill comes due).
- Variable expenses: In addition to fixed expenses, you likely have expenses that fluctuate month to month. For instance, your electricity or cell phone bill could change depending on your usage. Budgeting for these items can be a bit tricky since you can't always predict exactly what they'll be. Wondering how much you should budget for groceries each month? Take a look at these guidelines from the USDA.1
- Healthcare: One specific variable expense that many families face is healthcare. While your insurance premium is a fixed expense, your out-of-pocket expenses will vary from month to month and year to year. One way to account for this is to take the annual out-of-pocket maximum on your health insurance plan and divide it by 12. For example, if your family's out-of-pocket maximum is $6,000/year, a good idea is to set aside $500/month ($6,000/12) for unexpected health care costs. If you don't end up using it all over the course of the year, then you'll have some money left over at the end of the year.
- Debt payments: It's important to call out debt repayment as a separate line item in your budget. That's because even though payments on credit cards and loans might be a regular part of your monthly bills, it's not money you want to be paying out over the long-term (with the exception of a mortgage). Focus on paying down these debts quickly — maybe even applying extra payments when your budget allows — so you can contribute more to your other goals, such as savings.
- Discretionary spending: Here's where you'll budget for extras — things like concert tickets, meals out, happy hours, or whatever else you like to spend your "fun" money on. Generally, discretionary spending should account for no more than 30% of your total income.2 Depending on your income and unavoidable expenses, this number may need to be lower.
Finally, you should dedicate about 20% of your income to savings.3 Ideally, about 12-15% of that should go to retirement savings. However, for purposes of your budget, don't include retirement savings contributions to an employer-sponsored 401(k) or IRA in this section since those funds come out of your gross pay.
The rest should go to other types of savings, such as an emergency savings account, vacation fund, or college savings for your child. If you're also working on paying off debt, you can apply some of your "savings" money toward paying it down. After all, ridding yourself of high-interest debt is basically like saving money. Of course, if you can afford to pay off debt and save a full 20% of your income, that's great, though probably not realistic for many families.
Calculating your cash flow
Once all these items are documented in your budget, you'll be able to see your total cash flow for the month (income minus expenses). Hopefully, you'll end up with a positive cash flow, which means you have extra funds to spend, save, or roll into next month's budget.
If your cash flow is negative, however, don't panic. Sometimes an unexpected expense can put you in the red. To make up for it, you should aim to cut your spending in the following months — ideally from your discretionary spending. Watch out for a negative cash flow that's consistent month after month, which means you need to re-evaluate your entire budget.
To get started with creating a family budget, download our budget worksheet and customize it to fit your family's needs. Over time, you'll know exactly where your money is coming from and where it's going, giving you more control over your financial life.