Budgeting Plan for Families

Kids are priceless…and expensive. The government put the annual cost for a newborn at around $13,000 for a married couple in 2017. Adjust that for inflation and by the time the kid is 18, the cost of raising that child will be more than a quarter of a million dollars.

Clearly, a family budget can be a huge help in helping you balance all that spending with the need to save as well.

Step 1: Figure out what you’re actually spending.

No guesstimating allowed. We are all notoriously bad at remembering what we spend our money on.

If you don’t have the time or interest in doing the spreadsheet work –and with kids, that’s likely –using an online budgeting tool can be an efficient way to figure out where the money is going.

Step 2: Run your finances through the 50-30-20 test

There is no one correct way to prioritize your spending. Everyone has different priorities and is willing to make different tradeoffs. But what everyone has in common are three different claims on their income: Needs, Wants and Saving.  One strategy is to aim to spend no more than 50 percent on needs such as housing, debt payments and groceries. Another 30 percent is for things you want and 20 percent is designated for savings.

When budgeting with kids, you need to consider the needs that they have as well. Start with childcare and tuition costs, if this is necessary for your current situation. 

An increasing expense for many parents is youth sports teams. A recent survey found that more than half of parents spend between $100 and $500 a month on their kids’ sports. Nearly 30 percent copped to spending more than $500 per month. That’s per child. These kinds of activities are up to your discretion whether you consider it a need or a want for your situation, but it should be accounted within your budget either way.

Step 3: Divide Into Needs, Wants, and Savings

Once you have a handle on your current spending, divvy it up into the Needs, Wants and Savings Buckets. If your needs are eating up 70 percent of your take-home pay, then you might want to consider downsizing or figuring out where you can cut back. Moving is always an option, though it isn’t easy and can take up a lot of your budget. Consider if moving to a different neighborhood can help you lower your monthly housing cost while still offering great public education for your children.

Another place to look for excess spending is your transportation options. There is a difference between needing a car and needing a very nice new car that you financed with a long-term loan that eats away at your budget. According to Experian, the median monthly cost for a new car loan is more than $525.  

If you don’t have any way to compromise on the things you need, the only option is to carve it from the things you want. If you spend 70 percent on needs, then your budget for wants goes down to 10 percent. The worst move you can make for you and your entire family is to tell yourself you simply can’t afford to save 20 percent and skip that part of your budget.

Step 4: Make Saving a Must

There are two non-negotiable types of saving you must budget for. Not having an emergency savings fund that could support your family for at least three months —and preferably longer— is the financial equivalent of driving without a seatbelt. You leave your entire family at risk. 

Then there’s retirement. It is undeniably hard to fork over dollars today for something that maybe 20, 30 or more years off. You’ve got kids to raise today, retirement can wait. But this is where families back themselves into a dangerous corner. The longer you wait to start saving for retirement, the more you will have to set aside to have any shot of landing at retirement in good financial shape. Saving for retirement is something your kids will thank you for – when they are adults and relieved they don’t have to worry about helping cover some of your costs while diving into raising their own family.

Retirement saving should come before college. If you aren’t saving at least 10 percent of your income—and 15 percent is even better—for retirement, you really shouldn’t be contributing to a 529 College Saving plan. When it’s time for college, there are plenty of strategies for focusing on schools where your family’s net cost will be low enough that it can be covered with any cash flow you will be able to earmark for college costs during those four years and federal student loans. 

Making retirement saving a budgeting priority is going to serve your family well down the line.