How To Budget For A Family Income

Overview:

1. What Is A 50/30/20 Budget?
2. Why You Need A Budget in Place
3. Essential Tips For Sticking To Your Family Budget
4. Planning For Family Emergencies
5. Take The First Steps Towards A Better Financial Future

If there is one rule that makes knowing how to budget for a family income significantly easier, it’s the 50/30/20 budget.

It’s a fairly straightforward system that divides your income into three key categories. You split up your pay like this:

• 50% goes to essential living expenses (e.g. food, rent, bills, transport)
• 30% goes to “wants” and lifestyle expenses such as clothing, movies, restaurants, etc
• 20% goes towards your savings and short/medium/long-term goals

The 50/30/20 budget system provides a straightforward and structured approach to creating an achievable family budget. It enables you to prioritise the immediate financial needs and wants of your family, while not neglecting any long-term goals you may also have.

To put this system into action, you’ll need to track the money coming in and the money going out. This is how to go about it.

Assess The Family Income (Money In)

The all-important first step is to record the money coming into the household. This might include anything from wages or salary payments to share dividends, pensions or Government benefits.

You’ll want to record how much income you receive, where that income comes from and how frequently you receive it (i.e. weekly, monthly, annually).

Calculate Your Expenses (Money Out)

Once you’ve recorded the money coming in, you need to record your expenses. They typically fall under three categories:

• Fixed expenses – rent or mortgage payments, utility bills, council rates, food and groceries.
• Debt expenses – credit card payments, loan repayments.
• Unplanned expenses – medical bills, car repairs, etc.

You’ll want to record information like the amount of the expense, the frequency with which you pay it (weekly, fortnightly, monthly) and the day or date it comes out. An Excel spreadsheet can be an effective visual tool for this. You can see the money coming in, the money going out, and let Excel do all the necessary calculations that will help you put the 50/30/20 system into practice.

Knowing how to budget for a family income will help you to see how much money you have coming into the household and how much money you have going out. That way, you have the financial information in front of you to better plan for the immediate and long-term future.

Budgeting helps you meet short and long-term financial goals. When you set these goals, whether it’s to save up for an overseas trip or a down payment on a house, it

pays to take the SMART approach to goal setting.

You’ll see everyone from the big four banks to the Australian Government’s MoneySmart website using this acronym; it stands for goals that are:

• Specific
• Measurable
• Achievable
• Realistic or relevant
• Time-bound

Also important and something that will largely determine your budgeting approach is whether you’re setting short, medium or long-term goals.

Setting and Meeting Short, Medium and Long Term Family Budget Goals

How to budget for a family income can differ depending on whether you’re setting short-term goals or looking at the bigger, long-term picture.

Let’s put the five SMART components into common examples for each end of the scale.

Short-term goals are typically those that you’ll achieve within 0-2 years. So, whether you’re saving $700 for a PlayStation or $7000 for a holiday, this is the easiest way to go about it.

• Specifics – The family wants to save $7000 for an overseas holiday.
• Measurable – They set up a new savings account to save that money.
• Achievable – Both income earners create an automatic transfer that deducts $50 from their weekly or fortnightly pay and deposits it into the new account.

• Realistic – They know to keep the goal achievable and relevant, and make any necessary changes should financial circumstances change. That may involve increasing or decreasing your automatic payment to keep within your family budget.
• Time-bound – The family sets a time frame in which they aim to achieve their goal (e.g. “We want to save $7000 within 12 months / by the end of the year).

Medium-term goals typically sit within the 3-5 year timeframe and may include saving for a house deposit, paying off a credit card debt, or buying a new car. In this situation, you might follow a similar process to the one above. For medium-term goals, consider opening a higher interest-earning account, increasing the amount of your regular payments and keeping the goal within reach, depending on your income and budget needs.

One of the most common long-term goals for families, taking five or more years, is paying off credit card debt. This is how you might put a long-term SMART goal into action while still maintaining a comfortable day-to-day lifestyle.

• S – I want to pay off my credit card balance in two years.
• M – I will make more than just the minimum monthly payments.
• A – Instead of monthly payments of $200, I will increase those payments to $300.
• R – I will keep this goal within reach depending on my income and budget circumstances.
• T – The timeframe may vary depending on the value of the debt and the minimum repayment amounts.

Whether your goals are at the short-term end of the spectrum or you’re looking more long-term, it’s important to keep yourself accountable. Don’t get too down if you stray from the path or find you can’t maintain the pace. Make any necessary changes to your SMART goals that help you get back on track.

Now your family budget is in place, how will you stick to it? It will take some discipline, but some proven tips can help make it easier.

• Monitor the budget regularly – Keep track of your income and expenses every month to gauge whether your current budget plan still works for you. Changes to your income and expenses might warrant a revision of your plan.
• Look for ways to trim the expenses – If it’s been months since you actually used your premium Netflix account, or you can’t remember the last time you reviewed your energy bills, these might present good opportunities to save money.
• Make changes to your savings plan when necessary – Don’t feel like you’re locked in to putting aside $100 a week into your savings account forever. Changes to employment or life circumstances may require you to tweak your savings plan once in a while.
• Celebrate your wins! – Sticking to a budget is an achievement worth celebrating! Once you reach a financial goal, enjoy the moment!

There are plenty of online budget tools and smartphone apps that can help you track your spending and maintain your commitment to your budget.

One important factor to consider regarding how to budget for a family income is the possibility of emergencies. They happen to any family, whether it’s unplanned medical bills, a sudden loss of employment, or unexpected damage to the house. 

Saving for an emergency fund is well worth factoring into your family budget. Here’s what you need to do.

Determine How Much You Want To Set Aside

Working out how much you need in your emergency fund is the first step.

The general rule of thumb is to look towards keeping enough in your fund to cover two to three months of regular expenses.  This is the typical waiting period to access your superannuation or insurance in the event that you cannot work. Of course, you may want to consider having enough in there for a longer period. 

Determine What Counts As An Emergency To You

Set a clear definition as to what constitutes an emergency and stick to it. Replacing a broken toaster, while inconvenient, may be better suited to a “rainy day” fund.

Open A Savings Account

Just as you set up an account to reach your savings goals, doing the same for an emergency account will help immensely. Factor this into your 50% part of your budget. 

Consider A Loan

As we’ve said before, a loan is never a replacement for a savings plan. However, it can be especially useful when you find yourself in an emergency situation. Red Tree Finance has quick and helpful loan options available to help you out when you need it most. 

Take The First Steps Towards A Better Financial Future

Whether you already have a family budget or creating one is on the to-do list, structure and flexibility go a long way towards securing a better financial future. It enables you to set and achieve small or large financial goals while also maintaining a comfortable day-to-day lifestyle.

Red Tree Finance can also help you with our household-friendly cash loan options. Whether you’re planning a holiday or fixing up the house, or simply want to cut up your credit card once and for all, speak to us to see how we can assist.

What is the 50/30/20 rule?

The 50/30/20 rule is an easy-to-follow household budgeting system that helps families manage their finances with relative ease. The idea is that you set aside 50% of your after-tax income for essential expenses like food, rent or mortgage payments, and utility bills. You put 30% of your income towards lifestyle expenses that are more “want” than “need”, such as eating at restaurants, streaming subscriptions and other hobbies. The remaining 20% of your income goes into a savings account that may be used as an emergency fund or to achieve a savings goal. 

What is the 70/20/10 rule?

The 70/20/10 rule is effectively the same as the 50/30/20 rule, but with the percentages adjusted for families that want to set more realistic goals. They may come from more expensive neighbourhoods or be operating on a lower income. You use 70% of your net income for essential expenses and 20% for lifestyle expenses, with the remaining 10% going into savings. 

What are the first steps towards setting a family budget? 

First and foremost, what you need to do is get a comprehensive understanding of your household finances by listing the money coming in (your income) and the money going out (your expenses). The expenses should include anything that is fixed and consistent, like utility costs, house payments and council rates, and any variable payments. Once you’ve listed your expenses, separate them into essentials and non-essential payments, and work out where you may be able to reduce those expenses. It’s also a good idea to set up a savings account and create clear financial goals using the SMART method.

The information provided in this blog is of a general nature and is provided without considering your specific objectives, financial situation, or needs. It is intended for informational purposes only and should not be relied upon as financial, investment, or other professional advice.

Before making any financial decisions or taking action based on the information presented, you are strongly encouraged to assess its appropriateness in light of your individual circumstances. Red Tree Finance does not intend to provide personalised financial advice, and you should seek independent financial, legal, tax, and other relevant advice tailored to your unique situation.