A Parent’s Guide to Budgeting

Last Updated: March 2, 2023

What should be considered a four-letter word on par with "diet," the word "budget" typically gets a bad rap. Despite popular belief, budgeting can be both easy and fun! Lets face it, we all work extremely hard for our money, and without a budget, there's no way to really know where all your money (and time) is going. At this point you may be thinking "where am I going to find the time to manage a budget?" Don't worry, once that budget is set up, it only takes a few minutes each month to keep track of it. There are even apps that you can download to help track expenses for you.

Why bother with a budget?

Everything in life is an opportunity cost, spending a minute doing one thing is at the cost of doing something different. Since most of us have to work for a living, we trade time away from family and our personal interests for a paycheck. Parents especially feel this, as their precious time outside of work is spent trying to keep other humans alive. This leaves very little time to do what we want. Even writing this article is an opportunity cost, I could have spent the time with my family (or let's be honest, sleeping).

Keeping a budget will help provide clarity in your current financial situation, and where your money is going. Think of creating a budget as a plan of action for whatever goal you are pursuing. Whether it's to save for your kid's college fund, purchase a new TV, or plan that European getaway. This is the first step in mastering our finances, not letting it master us.

Making Money

The key to financial success is making more money than you spend. Easier said than done right? The first step is to figure out how much money your household brings in, looking at both gross income and net income. Gross income is your salary before any deduction and taxes, net income is after (also known as your take-home pay). These are important as you start to plan out your budget.

Once you have your gross income written down, take a look at how much you are paying in deductions and taxes. Deductions help reduce your taxable income and include things like insurance and contributions to a pretax retirement account or HSA/FSA. Saving for retirement is another critical element in the pursuit of financial freedom.

Net income is the cash that you will earn at the end of the day after all of your deductions and taxes have been taken. This varies by individual, as different states have different tax laws. If you live in a state that doesn't withhold income tax, you should bring home more cash per pay period. You'll need this to pay for everything from your mortgage to that daily latte at the local Starbucks.

Typically, income is considered either active or passive, and it depends on how it is earned. Active income is earned through some sort of product sale or service, whether it's you working at your full-time job, or running your own business. It requires you to be active in earning it. Passive income, on the other hand, is income that does not require you to be actively involved. Think rental income and investing in the stock market. Building passive income streams is another fantastic way to get out of debt and build wealth.

Spending Money

Expenses are anything that costs you money. But they are definitely not treated equally, and most can be controlled fairly easily. I like to break expenses down into two categories, bills and expenses.

Bills are consistent month over month, with minimal fluctuation. Items such as your rent or mortgage, electricity, water, and your phone bill. Expenses fluctuate month to month and vary based on your spending habits. These are the expenses to monitor and focus on cutting back on, such as eating out and those pesky online purchases.

In need of a quick win? Set yourself a weekly eating-out budget and stick with it. As with all things worth doing, getting started is the hardest part. You'll see that by eating out less it won't be just your wallet that thanks you. When I started tracking our expenses, I noticed that my wife and I were spending upwards of $500 per month on eating out. We had no idea but immediately made a conscious effort to set a budget and now we spend roughly $200 or less per month. Changing our eating-out habit saves us roughly $3,600 per year!

According to Psychology Today, research has shown we are happier making purchases that are experiential versus material in nature. Spending our hard-earned money on things to experience such as trips to the beach or attending a concert is more meaningful and will last longer than simply going out and making a quick purchase. For my wife and I, some of our best memories are spending a few hours together dreaming and planning a vacation, and then remembering it afterward. Experiential activities don't have to be pricey, even going to a new part of town or driving into the country to pick strawberries will do the trick. Take the kids and make a new memory that everyone will cherish.

At this point, you may be ready to slash your personal budget to the bare bones and start tomorrow gung-ho. I'm right there with you and have been quite a few times. I definitely want you to feel encouraged to go as extreme as you like, but with a word of caution. Your budget is a building block for the long-term plan that works for you and your family. Discuss and align with your life partner before cutting off the heat and selling your car to start biking to work. The last thing you want is to burn out in a month or two because, as it turns out, those five minutes of latte heaven were keeping your sanity in check.

Remember, it's okay to spend money on something that makes your life easier or brings you joy, especially if it's one of the cheapest options out there. Just don't go crazy. For example, having one or two streaming services is much cheaper than a cable package, but having all of them? Not so much. Some streaming services, like Hulu, offers the option to pause your service for up to 3 months at a time. Every dollar counts, so while this savings sounds slight, it adds up over time. Keep an eye out for bundles when you can. When we needed to upgrade to fiber internet for my wife's work-from-home job, we switched to AT&T, which included a free subscription to HBO Max. Even without the free subscription, AT&T had the highest speeds and best rates around, so it was a win-win.

 As long as you aren't carrying a balance month to month, using credit cards is a great way to enhance your budget. Most credit cards these days offer points or cash back to generate additional income. We only use our debit cards in an emergency, everything goes on our credit cards for the rewards, which we promptly pay every month to avoid any additional fees. It's like getting paid to use a credit line from your bank.

The ultimate goal is to live within your means. If you aren't, it's time for a change. While it's unlikely that you can change your living situation overnight to reduce your monthly mortgage bill, there are always areas to cut back on.

Budget types

While there is no one-size-fits-all budget that works for every family, there are four budget types that are widely used and worth considering. We personally use a hybrid between the 50/30/20 and saving-first budget. All of the below approaches are a great way to start tackling debt and building up your savings.

50/30/20: by far one of my favorite ways to approach budgeting. The 50/30/20 approach put simply is that each month, 50% of your money goes towards necessities, 30% towards things you want, and 20% towards savings. When starting out, these numbers can be adjusted to better reflect your personal situation, but it's a great framework and goal.

Savings-First budget: this budget uses your money first towards saving for the future before anything else. One example is dedicating more money towards a pre-tax retirement plan so that the funds are used before they ever hit your bank account. A great way to not only save for your future but reduce your taxable income.

Zero-based budgeting: even though this technique is utilized more by businesses (especially private equity firms), it's still very practical for your personal budget as well. Each month, you start from scratch and make sure that EVERY dollar is used towards something specific until you are left with zero. This can be used easily in tandem with the cash system or with a helpful budgeting app. 

Cash System: the Cash System has done wonders for countless individuals over the years, and has been proven to help curb spending when followed correctly. In a nutshell, each month, you "pay" yourself in cash what you are allowed to spend that month. From there, every purchase you make is with the cash that you have on hand.

Spreadsheet vs Apps

There is a plethora of resources that you can use to create and keep track of your budget. The old-school Excel spreadsheet works best for me, but I personally enjoy manually tracking our expenses. This has led to many wonderful conversations with my spouse as we plan for our family's future. We created an easy-to-use Budget Planner that once set up, should only take a few minutes per month to update.

If you'd prefer to automate the process, there are a few great personal finance apps to choose from today.

Living within your means?

Especially as parents, proper budgeting can lead to greater peace of mind and is the first step towards financial freedom. These are the tools that we can use and teach our children, to build generational wealth for our collective future.

The best part about starting a budget? You can start anytime - there's never a bad time to dive in. Check out our Budget Planner and start budgeting today!