Setting up a family budget is an important step to financial success and managing a family’s finances

By Petros Olympios, CFA

Recent research shows that as family expenditures keep rising, incomes remain fixed or even shrink. At the same time, total household debt is increasing across globally, and many people have no savings to tap into for unforeseen or urgent expenses.
Setting up a family budget is an important step toward financial success and managing a family’s finances. A sound budget helps families understand their sources of income and also realise what they spend their money on, assisting them in prioritising expenditures. Creating a budget can also help identify and monitor financial goals, such as saving for retirement, debt repayment or investing.
By following the steps below you can find out how you can set up a family budget, helping you understand personal finance.

Step 1: Gathering information
Before going about setting up a budget, you’ll need to gather all the necessary information about your finances. This includes monthly income from all sources, such as salary, benefits (if any), property rentals etc. You’ll also need to have in place all the documents relating to expenses, current obligations and savings.

Step 2: Setting your goals
Set the medium-term and long-term goals for your budget. These might include settling debts, creating a cushion (e.g. for one-off expenditures, your retirement etc) or saving in order to make larger purchases or investments.

Step 3: Calculating your income
Write down all the net monthly income for your family, including salary, benefits, rents receivable, allowances and any other income you receive on a regular basis each month. Avoid including any income that is non-recurring, such as overtime or tips, unless these are stipulated by your employment contract or are justified due to the nature of your work (e.g. nurses, police officers etc who work shifts). Calculate the net income you earn from these sources, having factored in any deductions (e.g. for income tax, Gesy contribution, defence contribution).

Step 4: Writing down your expenses
List all monthly expenses, including regular bills (electricity, water supply, phone, rent), food, travel expenses, entertainment, education and other spending. For expenses made on an annual basis (e.g. motor insurance, municipal fees etc), you can divide these by 12 to calculate the monthly allocation. Include any monthly loan installments you pay.

Step 5: Calculating the balance/adjusting
Deduct total expenses from total income to find the balance. A positive balance shows a healthy financial situation. If this is the case (income exceeds expenses), it’s recommended that you set aside a monthly amount for savings; doing this will help you attain your goals. Warren Buffett, one of the most successful investors of all time and one of the richest people in the world, has often said that we need to first save and then spend (and not vice versa).
If your balance is negative, that means that each month you spend more money than you earn (and usually finance this ‘gap’ by borrowing). In this case, you’ll need to take a closer look at your expenses and adjust accordingly.
You can come up with different ways to reduce your expenses, such as cutting back on going out, reviewing your subscriptions, or even cutting back on day-to-day purchases. It goes without saying that you’ll also need to assess whether you are able to increase your income (e.g. by working more, selling assets, etc.).

Step 6: Applying your budget
Having drafted your budget, you now need to apply it. That means adjusting your expenses (if needed) and keeping track of your income and expenses according to your budget and the goals you set. Monitor your progress and adjust the budget wherever needed.

Step 7: Adapting to change
Because life ebbs and flows, your needs will likely change frequently. So you’ll need to adjust your budget depending on your changing circumstances. Depending on the changes that may come up in your life – such as a change in employment and income, increased expenses or unforeseen spending – you’ll need to adjust your budget accordingly.

To sum up
Drafting a budget is vital to achieving financial success and avoiding financial problems. By following the steps outlined above and adjusting your budget to your needs and goals, you can create a powerful tool to help you manage your finances effectively and also confidently attain your financial goals.