Creating a Simple and Effective Family Budget

Creating a family budget is the cornerstone of financial independence. You work entirely too hard for your money not to know how it is allocated. There are basically 3 types of expenses you need to account for; Fixed, Variable, Periodic.

Getting Started. All you need to develop an effective family budget is your last three bank statements and bills. Six months is much better, but not necessary. There are great software programs that can do this for you, however, I will cover the old fashioned manual method.

Fixed Expenses. These are typically the easiest to budget since they very rarely change. Fixed expenses are items like car payments, house payments, insurance payments each cycle, cable bill (unless you engage in a lot of pay per view) and most home owner fees. Look at your last 90 days and write down the amount and name for each.

Variable Expenses. This will be your largest category. Credit card payments, utilities, gas for your vehicles, groceries and many others fall into this category. The best way to start a line item budget for variable expenses is to use a rolling 90 day average. Simply add up 3 month expenses and then divide by three to get the average. Capture your variable expenses, determine the average and list these along with your fixed expenses.

Periodic Expenses. These are payments made each quarter, semi-annually, or yearly. Periodic expenses are property taxes, vehicle maintenance, house repairs and vacations all typically fall into this category. If you are using a 90 day period, you may only have one or sometimes none of these expenses, but you will have to account for them. Again, list them with an amount and determine a monthly value for these expenses. For example, if you will need tires for your car and you estimate the cost is $600, then divide that number by 12 months and you will have a line item budget of $50 even though you will only write the check once.

Income. Do the same analysis for income. Fixed expenses are typically your salary. Variable income is travel reimbursements from your employer while periodic can be annual bonuses or investment distributions.

Cash Flow. Now is the time to determine your cash flow. Subtract the expense bottom line from your total income. The result is your monthly cash flow. A positive number means you have money left over that can be allocated for an emergency fund or other line item. A negative number means you have some more work to do on reducing expenses or increasing your income.

Make a Plan. Now that you know your financial monthly snapshot, you can make an effective plan. Put your expenses into common categories and determine how you compare to national averages.