How to Estimate a Family Budget

Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and holds certifications as a CIA, CISA, CFSA, and CPA, CA.

Financial management is crucial in making sure that the money getting out is not bigger than the money getting in. Learn about the importance of properly managing your budget and how to determine which should be prioritized. Updated: 04/13/2022

What Is a Family Budget?

Let's assume you're in a store where you see the latest cell phone. You ask your parents if you can have it, and they say ''no, we can't afford it right now.'' Do you ever wonder how they knew that they couldn't afford the phone?

Your parents probably have a budget, or the amount of money being earned and spent on a monthly basis, that identifies the amount of money coming into your house from your parents' jobs, known as income, and the amount of money that they spend on things such as groceries and rent, which is known as expenses.

Since a budget shows the areas in which you're spending money, it's a good way to make sure that you always have enough money to purchase the things you need. A budget will also help you save for things that you might want such as that new cell phone or tickets to a concert.

Having a budget also helps you stay out of debt. If you're in debt, this means that you owe more money to others than you're earning. Having debt is expensive because whomever you owe the money to will likely charge you interest, which is meant to compensate the lender for the amount of time that you used their money. Let's take a closer look at what a family budget might look like.

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  • 0:04 What Is a Family Budget?
  • 1:11 Family Budget Components
  • 2:11 Completing a Family Budget
  • 4:19 Comparing Alternative…
  • 5:55 Lesson Summary
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Family Budget Components

There are a number of monthly expenses that your parents may have to pay including:

  • Housing (like rent or mortgage costs)
  • Household expenses (like groceries or clothing)
  • Transportation (like car payments, gas for the car, and public transit)
  • Insurance (for things like the house, the car, and life insurance)
  • Medical and health (like prescriptions or doctor's appointments)
  • Communications (like smartphone, cable or satellite TV, or Internet)
  • Financial (like loans and credit card payments)
  • Taxes (like personal income tax and state taxes)

In order to pay for all of these items, there has to be some money coming into the household. For most families, this amount will include the income that your parents earn from their jobs.

When preparing a budget, the amount of income should be higher than the amount that's being spent on a monthly basis. If your family is spending more money than they have, this isn't a situation that can continue long term.

Completing a Family Budget

Let's meet Rachel, a teenager who lives in Coolsburg. She would like to estimate her family's budget for the month and determine how much money her parents must earn every hour in order to cover all of the family's expenses. Let's see if we can help her with this task.

The first thing Rachel has to do is gather information on all of the family's expenses for the month. After talking with her parents, she has gathered the following information for the month of May:

Housing $1,000
Food $550
Clothing $125
Child care $450
Transportation $375
Insurance $175
Healthcare $325
Communications $225
Financial $450
Taxes $275
Total for the month $3,950
Total for the year $47,400 ($3,950 x 12 months)

The next step is to figure out how much her parents must earn every month in order to pay for the family's expenses. Let's assume that Rachel's mom, Melissa, works 40 hours per week and her dad, Brad, works 25 hours per week, for a total of 65 hours. Let's calculate the average hourly wage that Rachel's parents must earn in order to cover the family's expenses.

Rachel's parents are working 65 hours per week or 3,380 hours per year (i.e., 65 hours per week x 52 weeks per year). Since they have to cover $47,400 of expenses every year, they would have to earn $14.02 per hour (which we get from $47,400 / 3,380 hours).

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