Deborah teaches college Accounting and has a master's degree in Educational Technology and holds certifications as a CIA, CISA, CFSA, and CPA, CA.
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.
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:
|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).
If Rachel's parents earn $22 per hour combined, then they would have no problem meeting their monthly expenses. If her parents earned less than $14.02 per hour combined, they wouldn't be able to pay all of their monthly expenses and might have to look for ways to reduce their spending.
Comparing Alternative Job Offers
If an individual is given a choice between job offers, it's helpful to determine which one would best cover the family expenses. Let's assume that Rachel's family is moving to Winter Ridge. Her dad has already accepted a job earning $19,000 per year and her mom has two job offers: $550 per week for 50 weeks per year or $12 per hour, 160 hours per month, for 12 months per year. Let's determine which job help cover the family's yearly expenses of $44,100.
Since Rachel's dad will earn $19,000 per year, then her mom only has to earn $25,100 per year (i.e., $44,100 - $19,000) to cover the family's expenses.
Option 1: $550 per week for 50 weeks per year
Rachel's mom would earn $27,500: $550 per week x 50 weeks per year. This income is greater than the $25,100 needed so this option would cover the family's expenses.
Option 2: $12.00 per hour, 160 hours per month for 12 months per year
Under this option, Rachel's mom would earn $23,040: $12.00 per hour x 160 hours per month x 12 months per year. This option provides less than the $25,100 the family needs to cover its expenses.
Rachel's mom should accept option one, as she will earn more than the $25,100 needed to cover the family's expenses.
All right, let's take a moment or two to review. Budget identifies the amount of money being earned and being spent on a monthly basis. This is calculated from your income, which is the amount of money coming in from jobs. Ideally, you want to spend less than you're earning; otherwise, you will be in debt. If you're in debt, which means that you owe more money to others than you're earning, then you owe money to someone else and you will have to pay interest to compensate them for using their money.
A family budget will contain expenses, which is the amount of money that they spend on things, such as groceries and rent, as well as things like housing, household expenses, transportation, insurance, medical expenses, communications, financial expenses, and taxes.
The first step in completing a family budget is to gather information on where the money is being spent every month. Once this is determined, it can be compared with the amount of income earned from jobs. If the monthly income is greater than the expenses, then the family has some money to put towards savings. If the expenses are greater than the income, then the family is overspending and is in debt.
To unlock this lesson you must be a Study.com Member.
Create your account
Register to view this lesson
Unlock Your Education
See for yourself why 30 million people use Study.com
Become a Study.com member and start learning now.Become a Member
Already a member? Log InBack
Resources created by teachers for teachers
I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline.