Family budget: 6 easy steps to reach financial freedom

Family budget: 6 easy steps to reach financial freedom
Get in control of your family budget and reach financial freedom.

Get in control of your family budget and reach financial freedom. Save more by understanding your income, expenses, investments, and debt balances. Reach financial freedom by setting personal budget goals for you and your family.

Getting started with your family budget

Your family budget is a list of your income and expenses, together with your savings and debt balances. That means taking note and understanding at every end of the month what was your:

  • Income, or how much you earn, 
  • Debt, or how much you own, 
  • Expenses, or how much you spend, 
  • Saving, or how much you save.

Personal, household or family budget are all interchangeable names for the same thing. Therefore, I will use them as such in this text.

Some people get a bit intimidated when they hear about having a monthly budget. In truth, it is a straightforward concept, you probably already do it in your mind several times a month. A family budget is a financial plan that allocates future personal income towards expenses, savings, and debt repayment based on past spending and income data. Sounds confusing? Maybe, but it is not. Continue reading and learn how to start planning your personal household budget systematically.

Creating a budget is a common tool for debt management to practice discretionary spending. Organizing your bank statements by using budgeting tools or a budget worksheet can make it much easier to set your financial goals.

Below you can see an excellent example of these critical points of any household budget: income, expenses, debt, and savings.

A family budget covers four basic items that you must track in order to take control of you personal finances: income expenses and debt.


Family budget example – how a simple budget looks like?

To give a real-life example, we can have a look at the 2018 consumer expenditure report from the U.S. Bureau of Consumer Statistics. In this study, we can see that the average American household income before taxes was $78.635,00, and its total expenses $61.244,00, or 78% of that. Although pension is factored in the costs, if you add 15% income taxes to it, it is easy to see that the average American finished the month without much opportunity to save money. And that is why you need to control your family budget. Below you can see the personal budget exercise for this case where the yearly savings ended up on 8.4%, much less the recommended 20%.

If you want to manage your money well, you must have a good understanding of these four elements, how they evolve through time and what is their monthly trend. Before we go into detail on each of them, there are two essential things that you must think about: what is your goal and how details your household budget should be.

Family budget example showing average american income and savings.

1- Defining your Goal – What do you want to achieve?

First of all, you must decide what your family budget goal is. Don’t neglect the importance of this step. Having a household budget is not an end in itself, it will only be worth the effort if you have a clear objective with set targets and a defined timeline.

How do you set your family budget objective?

With personal finances as well as with anything else, you need to be S.M.A.R.T. when setting your goals. You might have heard about this acronym before, it was created in 1981 by a guy called George T. Doran. He wrote an article called “there’s a S.M.A.R.T. way to write management’s goals and objectives.” The concept is straightforward, but applying it can make your objectives and goals much more realistic and efficient. The purpose here is to set a S.M.A.R.T. goal for your personal budget, meaning your goal will be:

  • Specific: Target a particular area for improvement
  • Measurable: Set a number that you can measure for your target
  • Achievable: Be realistic when setting your target
  • Relevant: Ensure that the goal is appropriate for you and your family. This will keep you motivated to continue pursuing it.
  • Time bounded: Set a target date for the goal to be achieved. Once you do it, ensure to celebrate, reward yourself, and evaluate what is going to be the next goal.

Family budget objective examples

This technic can be used in your professional and personal life. I have been doing it, and the results are excellent. Here are some examples:

  • Not Smart: “Improve household finances”, “get more money”, “improve debt”, “reduce my student loan”.
  • SMART: “Reduce debt to $1,000 by cutting expenses in the next 6 months”. “Reduce fixed expenses by 15% within 6 months”, “Increase savings allocation by 10% in the next year”.

You don’t need to have only one goal, but it is advisable not to have more than three.

2 – Simplicity – Keep it simple, don’t over complicate it

I did my first personal budget when I was a teenager and was traveling around Europe before starting university. I was backpacking alone for three months and the cash for the entire trip in my pocket (at the time, debit cards were not that common, and the fees were huge). My biggest worry was to run out of money at some point. As a result, my goal was that the money had to last until the end of the trip.

At the time, I had a small notebook where I took note of all my spendings. I set a daily target for lodging, transportation, food, and entertainment. Every day I would add up the values and evaluate how each category was developing. It took about 5-15 min per day, and it was enjoyable to do it.

 There are several ways of doing your family budget. You can use a notebook as I did at that time, you can use excel, or even a dedicated personal finance management software.

Deciding how much to spend on food per month

Simple goals can take you further

My advice is that you set up your goal, evaluate what are your strengths, and choose what to use accordingly. For example:

  • You work with excel daily, it will probably be easy for you to use it as well for your personal finances. 
  • Is your goal based on streamlining your expenses to the bone? Having a mobile app to track your costs will make sense in that case. 
  • Is your objective a long term debt reduction by reducing your fixed expenses? You can probably get away with a notebook.

There is no single recipe, and what it works for you now might not be the same in some time when your goals mature. The most important thing is to start doing your family budget and evolve from there.

Enough with planning and definitions, let’s start talking about money.

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3 – Personal Income – Where does your money come from?

Personal income is where your money comes from. It will be the addition of your salary with any other side hustles you might have. One of the key ways of achieving financial freedom is actually increasing your personal income. As some people say: cash is king.

But we need to be careful not to fall into the trap of believing that the secret to success and financial stability is to earn more. It is not. Of course, it helps, but making a lot of money is not by itself the solution for your financial worries.

More than just earning a lot of money to reach financial stability, you must consistently spend less than you earn. To be able to that, you must know how much money you make.

That’s how your personal income falls into your own budget: take note of everything you earn and do it consistently. 

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Net income or Gross income? What is the difference?

Gross income is your income before taxes, that’s what is usually listed in a job offer letter, for instance. Comparing gross income is a bit misleading as the amount of tax you pay differs a lot depending on where you are. In the U.S. alone, it can vary more than 10% depending on if you are in North Dakota (3%) or California (13%). This 10% difference might be the difference between someone that can save at the end of the month or someone else that won’t be able to do the same.

Net income, on the other hand, is what you can take home. It is your income after taxes. If net income is what usually matters to you, why do people typically talk about gross income? I personally think there is a little bit of psychological bias there. People prefer to talk about higher values as it makes them feel and look better. But there are some practical reasons as well. Your net income might not be the same every month, for instance. Usually, your payslips will have a couple of discounts other than taxes, making it harder to have visibility on what is your exact net income.

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Family budget top-line: net or gross income?

Ok, now I understand what net and the gross income is. But which one should I use on my home budget?

I have tried different approaches over the past years. When I started with my financial planning, I wanted to have control of everything. I would calculate all my home budget lines down to the cent. My finance planning spreadsheet had macros, colors, and automated functions. But at that time, I also had a lot of free time, and my finances were far from under control, so the over details approach made sense.

Today I have a lot less free time, and my finances are quite stable, so I have a more straightforward approach. I consider my net income as the value I usually receive in my bank account every month. 

My advice to you is not to overcomplicate at the start. Get your last three or four payslips, take the average of how much was deposited in your bank account and use this value. Do it for a couple of months and evaluate if the results are making sense. Add more details further down the road if you feel more granularity and precision is needed.

The family budget shows your net income in the top line. Net income is your income discounted of any taxes.

Family budget example – giving more detail into it

Excellent! Now you know what your gross income is and how much is your net income. This will be the Top Line of your personal budget! If you are wondering why it’s called Top Line, you probably guessed correctly, that’s the line that goes on the top of your personal budget. Below you can see a simple representation of a personal budget that is using net income as the base to calculate the monthly balance after the critical fixed and variable expenses.

Family budget example for the first quarter of the year. Net income, fixed expenses, variable expenses. Balances for emergency fund, irregular expenses envelope and investments.

4 – Personal Expenses – Where is your money going?

Now that’s where the fun starts! Personal expenses are where your money goes. Mainly we want to do something with our money, that’s why we are saving in the first place. But we want to do it smartly, efficiently. That’s why having a good understanding of your personal expenses is so important. At the end of the day, financial freedom is about using your money to meet your short and long term objectives – you can’t spend everything now; otherwise, you won’t have enough for your long term goals.

Usually speaking, we can classify our expenses into three types. It is essential to mention that these classifications are not written in stone, you must understand the concept behind each of them and then apply it to your reality. What is a fixed expense to some people might not be for others, there is no single magic formula.


Plan your spending. Only purchase what you have planned for.

Fixed expenses – Your monthly fixed costs

This is your recurring fixed cost. It might vary a bit from month to month, but at the end of the day, you know it will come within that average value. Usually speaking your fixed expenses will be a mix of:

  • Utility bills
  • Rent payments
  • Insurance payments
  • School/university fees
  • Student loan payments
  • Club membership
  • Transportation costs to and from work
  • Basic food costs (minimum to cover your day to day costs, does not include your anniversary celebration fancy dinner)

A good practice is to track these values for 3-4 months and then arrive at an average value that translates to your base fixed cost. Make sure to include critical expenses like your student loan.

You can then check how much this represents in percentage points of your Net Income. Your family budget will mature over time, that is natural, the more you do it the more you will understand your habits and the most efficient ways of tracking your expenses.

Focus on the Long-Term Benefits of Purchases

Irregular expenses – Create your Irregular Expenses Envelope

Irregular expenses are similar to your fixed expenses, but they don’t happen every month. They might be every quarter or every year, but you know they are there waiting to hit you at some point. Examples of irregular expenses are:

  • Mandatory vehicle maintenance
  • Insurance payments (if not paid monthly)
  • Taxes

Irregular expenses are dangerous because they can get you off guard. One option to account for them is to set aside a certain amount for it every month. For example, if you know, there will be a $1,200 cost every December, better to start saving $100 every month.

I will cover in the savings session how to create your irregular expenses envelope in your household budget.

Pay in full and in cash

Variable expenses – the costs that you can quickly act upon

These are the expenses you can control, you can decide how much and when you will incur this cost. When trying to save money, usually the low hanging fruits can be found here:

  • Entertainment
  • Eating out
  • Tobacco/Alcohol
  • Groceries
  • Sports, hobbies
  • Babysitter
  • Children activities
  • Lottery
  • Magazines, books
Don’t spend your money based on ads and marketing speech

Savings expenses – Create your investments envelope

Life is made of projects. They can be short term like buying some new furniture or long term, like retiring in the Bahamas. Either way, chances are you will have to save money to complete them.

One way of organizing your savings is to segregate your savings in envelopes and compute them as savings expenses. I will cover in the savings session how to create your investment envelope in your family budget.

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Several factors can affect your hourly, daily, weekly and monthly salary. The number of days you work during the year, your holiday pay and vacation time are all affecting your salary breakdown. Here are some points to take into account when trying to answer how much hourly is 40000 a year.

5 – Debt – keep it as low as possible

Debt is how much you own. It means you are using an anticipated income to increase your purchase power. Debt is necessary, so you can buy things that are too expensive to be purchased with the cash you have on hand – a car, a house, a long haul flight for your vacation, etc. Common household debts include:

  • Mortgage loans
  • Car loans
  • Credit card debt
  • Bank loans

In nearly 100% of cases, your debt will come as a cost, and therefore your main priority must be to get rid of it. Pay your debt as soon as possible should be the plan for the majority of cases.

Your depth payments may appear under your fixed expenses (in case it is something you pay every month). Or it can be shown in your personal budget under your variable expenses (in case the payment is made every quarter or every year). 

Risks of one size fits all investment plans

Having visibility of your debt is a key benefit from your family budget

Either way, you must have a clear picture of your total debt at the end of each month. This visibility is essential to incentivize you to pay your debt as soon as possible and to ensure you don’t increase the pile even more. Therefore, at the end of each month, you must have a value for your income and expenses, together with your outstanding debt.

Once you have compiled your list of debt, try to establish if this balance was built to buy long term assets like a car or a house or if it is comprised mainly of a stack of futile credit card bills. The further away you are from the money, the easier it will be to spend money. That is called the transparency effect, and it is the main reason people tend to spend more when they use credit cards vs. cash. Periodically reviewing your personal budget is a good way of avoiding the transparency effect.

Time Value of Money

6 – Savings – Save, invest, repeat

We have established a goal for your family budget, decided the level of detail, or simplicity we need to have to achieve this goal. Then we went through understanding your net income. After that, we classified all your expenses into different categories, and then we reviewed the concept of debt – including when it should and should not be used. 

All of this was done so we could arrive here, we are now talking about the money that survived your taxes, your fixed and variable expenses, your debt! We are talking about hard-earned money that must be carefully allocated.  If you think about it, everybody wants to win. In order to do so, you must take risks, and in order to succeed consistently, you must ensure risk management in personal financial planning takes place.

I like to use the concept of envelopes to allocate my savings. In reality, the money is all scattered around different investment portfolios. Still, for the aspects of my personal budget, it is as if they were physically in 3 separate envelopes. Whenever I need the money, I withdraw from the investment that is performing the best and subtract the money from the respective envelope on my household budget.

It is a system that works really well, I call it the envelope system but some people also refer to it as the envelope budgeting method. The key idea behind it is to prioritize your income to different savings categories. Dave Hamsey talks a lot about it in his book, The Total Money Makeover: A Proven Plan for Financial Fitness.

Irregular Expenses Envelope

Irregular Expenses Envelope

Taking care of your irregular expenses is a critical step to financial freedom. Sketch a calendar for the next 18 months and list your future irregular expenses (annual insurance costs, taxes, mandatory vehicle maintenance). Then define how much you need to save each month to meet the requirements to clear these costs. 

As the money will be spent in the next 18 months, you will need to choose a short term safe investment to keep this money in. Still, the liquidity can be high as long as you have the discipline to withdraw the funds in advance.

Emergency Funds Envelope

Emergency Funds Envelope

Once your debt is cleared, ensure your most pressing irregular expenses are taken care of. After that, your first priority should be to get your emergency fund set up. The emergency fund should hold enough money to cover for any pressing emergency you might have, such as medical bills, unemployment, or accidents. As such, the money must be allocated on a safe and liquid investment. 

The problem with safe and liquid investments is that they generally don’t offer good profitability. Therefore, at the same time that the emergency fund is vital to cover your needs in case of an emergency, it will not be something profitable. 

Choosing how much to keep in your emergency fund will depend on several factors, such as:

  • Life stage 
  • Chances of losing your job
  • How hard it is for you to find a job if you become unemployed
  • Number of dependants

Overall the recommendation is to have from 6 to 12 times your net pay set aside for emergencies.

Investments Envelope

Investments Envelope

Investing is where your money will start working for you. Here is where you can multiply your hard-earned dollars and over time, achieve your financial independence and freedom. You can read a good article from Matt Ramey about how money is used to make money.

BONUS TIP: Want to booster your monetary self-awareness? Check this post I wrote about financial literacy and take this free financial survey questionnaire. No e-mail, log in or registration needed!

Read more:

Continue reading and learn more about finances:

Featured video on risk management in personal financial planning. How to be reasonable and take moderate risks with money.

About the author:

Personal Finance Made Easy

Hi, I am Leblon Blue. Mid-thirties senior manager on a large corporation. Happily married for seven years and waiting for my first kid. I have dedicated my past 15 years to build an engineering background and a stable career. After working in Europe, Scandinavia, and Latina America, I am now based in the Persian Gulf, where I manage the performance of a large corporation that operates in the region.

Find more about Leblon Blue.

Written by Leblon Blue

Career manager with engineering background. Finance enthusiast. Recently started this blog. Enjoying financial freedom.


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6 proved steps on how to manage money and unlock financial freedom

6 proved steps on how to manage money and unlock financial freedom

Financial survey questionnaire - personal finance

Free financial survey questionnaire to booster your monetary self-awareness