You know what they say: Christmas is a time for giving!
But unfortunately in western society, Christmas is also a time for over-spending, extravagance, and going into (more?) debt.
It has become so ingrained in us that we need to buy everyone everything that their heart desires, that most people don’t even bat an eyelash at spending way more than their finances allow them to and racking up some credit card debt in the process.
But I disagree with this practice!
As someone who has been in debt and is now out of it, I can tell you that nothing is better than living within your means.
So in this post, I’m going to show you how we create a realistic Christmas Budget for our family, without going into debt… or missing out on any of the holiday fun!
1) Determine Your Budget
This is where most people make a mistake when it comes to budgeting for Christmas: they start buying first, and they don’t look at their budget until after they have already spent too much… or committed to spending too much.
Start by looking at your budget first and figuring out exactly how much money you can afford to spend.
I recommend never going into debt for Christmas and only putting things on your credit card if you can (realistically) pay it off in the same month that you spend it in.
If you are already in credit card debt, don’t go any deeper into debt and stick with the bare minimum. Think one small gift per person for your immediate family bare minimum. Trust me, Christmas isn’t worth increasing or going into debt for.
(If you want to check out how we got rid of $20,000 in debt in 18 months, read this post!)
A lot of parents have a hard time with this because they are worried about their children feeling left out. But honestly, it’s just part of life!
If our kids wonder about their friends receiving more than they do, we talk with them about money.
Check out this post if you want more tips for how to not worrying about keeping up with the Joneses.
Decide on an amount that you will spend on Christmas that will work with your budget, and determine to stick with it no matter how awesome that cool new toy is!
2) Start Saving Early
The earlier you start thinking about the Christmas Budget, the better prepared you will be to purchase the gifts on your list without going into debt.
Have a Christmas Bank Account
One way to plan for Christmas all year round (and to let yourself spend a little more if you want to) is to create a Christmas Bank Account.
To start a Christmas bank account, all you need to do is take the amount of money that you would like to spend on Christmas and divide it by 12. Then, each month, take 1/12 of the money and put it into the bank account.
Then when Christmas rolls around, you will have all the money saved and ready to use.
Once you know how much you want to Christmas total, decide how much you want to spend on your kids and on each other.
We didn’t used to start with our immediate family when we determined our Christmas budget…
and then there were a couple of Christmases where Ross and I didn’t get each other a single thing because we had spent our Christmas budget before we got around to spending anything on each other.
Now we always start with how much we want to spend on our family before we even think about spending anything extra on anyone else!
4) Make Your Lists
Now take the total amount you are going to spend on your immediate family, and decide how much you want to spend on each person.
You don’t have to worry about spending the exact same amount of money on each child…
I actually don’t think that I have ever spent the same amount on each child. And that is because when we are deciding what goes on their lists, we figure out what they need first.
I’ve found that it changes from year to year who ends up getting more because their needs change from year to year.
Last year our younger daughter got more last year because she was 18 months old and had primarily been playing with her sister’s old toys. She needed things like her own special doll to play with.
This year our oldest daughter will be getting more gifts because she has more needs.
We have never seen the point in spending more money on one child just to even the playing field because, honestly, kids don’t care how much you spend on them or their siblings.
As long as you are giving gifts to your children that they truly want or need, they will be happy.
I often like to follow the “want, need, wear, read” rule, but I don’t use it every single year. Some years they don’t get any new clothing, and sometimes they have multiple needs. But if you are trying to have a simplified Christmas list, it’s a great place to start.
5) Talk To The Grandparents
Getting the grandparents involved is a grate way to save money and still get your children presents that they would love.
Like I mentioned in this post, almost as soon as I know what I want the girls to receive for Christmas, I call my mom and see if there is anything on the list that she wants to get them.
This helps us save money, it reduces the clutter in the house because I’m just re-distributing the gifts that I already wanted them to receive, and it helps my mom know that I will approve of everything on the list even with my Minimalist preferences🙂
5) Then Decide on Extended Family Gifts
Only after you’ve figured out what you can afford for your immediate family should you figure out if you want to exchange gifts with your extended family.
This concept might seem strange if you’ve always given gifts to your extended family, but you actually don’t have to continue doing this… especially if you are on a tight budget.
Don’t Be Afraid to Change What You’ve Done in the Past
Before we had children and had two incomes we did extended family gifts for both sides of the family every year.
But once we became a single-income family, we decided to change how we did things.
We now only exchange gifts with the side of the family that we are spending the holiday with.
Draw Names
Another way you can save money on extended family gifts is to draw names instead of just buying something for everyone.
We did this even before we were on one income.
It’s a nice way to spend more money on a nicer gift for someone else, and it allows you to receive one nicer gift instead of a bunch of things that you don’t really want or need.
Budget Boosters
If you are reading this and thinking that you haven’t saved enough money for Christmas this year, here are some things you can do:
1) Sell Some Things
We love making some extra cash when we need to declutter anything, because, well, who doesn’t like earning some extra money… and selling some items will also help you get rid of a few things before you get a bunch of new stuff in your house that you need to declutter.
(Just kidding… I love Christmas, just not clutter that can sometimes come with it :D)
2) Decrease the Number of Gifts
If you don’t have enough money to buy your kids all the gifts on their list, scale things back, and just give one or two gifts per child.
You will probably be able to get them something a little nicer this way than if you buy them a lot of cheaper gifts.
3) Buy for Less People
It can be hard to decide not to exchange gifts with extended family or friends, but I promise that you will be far less stressed about sticking with your budget if you have fewer people to buy for.
And remember that just because you decide to buy for less people this year, doesn’t mean that you can never do gifts with your extended family again.
It’s overwhelming to think about where every dollar needs to go and how to pay off debt and save money!
Plus, you are supposed to keep track of all the money in one or two bank accounts, yet somehow remember how much you have left to spend, and what is supposed to stay in savings? Yikes!
Luckily, there is a much easier way to keep track of your money. And that is to have multiple bank accounts.
7 Bank Accounts?? That’s so many!! Why on earth would you need to have 7 bank accounts unless you own a business???
Well, here’s an example of why it is helpful to have multiple bank accounts when organizing your budget:
Let’s say that you are getting ready to clean your living room.
Your kids have toys laying around, your husband has some work things sitting next to the door, the remnants of a craft project are over here, and some laundry that is needing to be folded is over there.
Would you just open up a closet, shove everything in it, and close the door quickly behind you?
What would happen if you did that not just once, but every time you cleaned?
I would lead to a huge mess in the closet!
What would you do when your child asks you where the toy they were playing with two days ago is?
You have to dig through everything else in the closet to find it.
What about when you need to find something that you put in the closet a week ago? A month ago? A year ago??
It gets very difficult to know where things are, when they were put into the closet, and what they are supposed to be used for.
The same is true for money in a bank account.
Month after month we throw money into one (or two!) accounts, cross our fingers, and say a prayer that all of the money goes into the right place.
But if we divide up the money into multiple bank accounts, it becomes very easy to track how much money we have for each item in our budget, and how much money we have saved for the future.
Having multiple bank accounts is the easiest way to organize your money when you are starting a budget.
(By the way, if this sounded like the way that you clean, you may want to check out this post!)
Why Have Multiple Bank Accounts?
Let’s say that you want to put $100 away each month for a new car, $100 each month for a vacation, and $100 each month for your kid’s college savings.
If you are using one savings account, then all $300 dollars would go into the account every month.
In a year, you will have $3,600 in that account.
Now you thought your old car would last you a little longer, but you get rear-ended and now need to look for a car before you were planning on it (don’t ask me how I know…). You check your bank account and decided that you have enough to put $2,500 down on the new vehicle. You purchase a vehicle and take $2,500 out of the account.
But how much money did you really have saved for the vehicle? Only $1,200! So how much money do you have left for your vacation? How much money do you have saved for college?
Nobody knows! You accidentally borrowed from one of the other accounts!
And let’s be honest, you probably borrowed for the college savings because when it comes time for your vacation, you will still go with your family.
When you have multiple bank accounts you are able to track exactly how much money you have saved for each item, and you won’t be accidentally stealing money for other accounts.
Now, let’s see what happens if we have multiple bank accounts.
Using the example above, you would put $100 into your car savings account every month, $100 into your vacation savings account every month, and $100 into your kid’s college savings account every month.
At the end of the year, you have $1,200 in each account, and when you need that new car, you know exactly how much money you can afford to spend on the car.
You can still borrow from you vacation account if you want to, but you won’t be accidentally draining your kid’s college fund.
How Do You Keep Track of So Many Accounts?
If all of your bank accounts are at the same bank, you can easily see how much money is in each account through the dashboard of your bank.
If they are through different banks (or if they are through the same bank but you want to be able to track how much you are spending on each category within each account) you can use Mint.com to track everything.
Mint.com is a completely free budget tracking tool so you can see everything all in one place.
Ross loves using Mint.com to keep a close eye on our budget!
Will It Hurt Your Credit to Have Multiple Bank Accounts?
Nope! It hurts your credit when you don’t pay your bills or debt payments on time.
If you use this method correctly, it will actually help your credit because you will have a more organized approach to paying your bills.
7 Bank Accounts Every Family Should Have
Checking Accounts
A Checking Account is an account that you have a bank card attached to. This is separate from a Savings Account because you don’t want to be able to access your money in savings at the swipe of a card.
Here are some important checking accounts to have:
1) Staging Area Account
This is the account that all your money comes into… temporarily.
Your paycheck, tax returns, refunds, and any other money that you receive all go into this account. (Unless it’s money specifically for your birthday or Christmas, then it could go into a fun money account/or a personal account.)
But the money won’t stay here long because this is your staging area. This is where your money comes to wait for its assignment.
Link your auto-drafts for all of your recurring monthly bills to this account: your mortgage, your rent, your utilities, your insurance… anything that is an expense that you know will happen every month.
It’s also smart to auto-draft your savings first thing when you get your paycheck because we to be sure that we pay ourselves first and the money doesn’t mysteriously “get lost.” throughout the month.
2) Husband’s/Wife’s Checking Accounts
Almost everyone likes having money that they are personally responsible for and can use as they see fit. That’s where the Husband’s/Wife’s Checking Accounts come into play.
There are two ways you can use these accounts:
You can divide up the monthly responsibilities and put the money each person is responsible for into each account. For instance, if the wife is responsible for groceries, you would put the monthly grocery budget into her account and she would pay for groceries with the corresponding debit card.
The second way to use this account is to deposit some discretionary money into this account. This is money that you can use how you see fit without needing to chat with your spouse about it first. This could be for anything from having money to use when you go out with the guys, get a pedicure, or save for an expensive coat that you have been wanting.
We use these accounts the second way, but either one is a good use of these accounts.
Emergency Accounts
Emergency Savings Accounts are for exactly what they sound like… emergencies!
This is money you don’t want to have a debit card attached to, but you want to be able to access the money fairly easily.
Having your Savings Accounts at the same bank that you have your checking account at works well for this. You can easily move the money into your checking account if you have a need for it, but it isn’t in your wallet at all times in case you decide you really need that new grill right now and “you’ll just pay back your savings later.”
Pro Tip: Don’t borrow from these accounts! Only use them for true emergencies. Trust me, money doesn’t get paid back as easily as it gets drained!
3) Emergency Savings Account
The most important savings account you can have is an Emergency Savings Account.
This account is used for exactly what it sounds like… Emergencies!
Emergencies are things like a job loss or a house loss. A medical emergency could also fall into this category, but I recommend having a separate Health Savings Account for this (see #2 below.)
If you don’t yet have an Emergency Savings Account, open a savings account, and put every bit of cash you can spare into the Emergency Savings Account until you have at least $1,000.
If you want to stop once you reach $1,000 and that feels like good padding between you and any emergency, then you can move onto the next account.
But I recommend not moving past this step or creating more accounts until you have at least 3 months of your expenses saved into this account.
If you are using the 70/20/10 Rule for Budgeting, this is where you want 20% of your net income to go until you have your base in this account.
Ideally, you want to continue contributing at least half of your 20% savings (or 10% of your income) into this account until you have 6 month’s to a year’s worth of expenses in your Emergency Savings Account.
4) Medical Savings Account
I recommend having a separate savings account for your families healthcare.
There are two ways to do this:
Medical Savings Account Option 1
Insurance companies often have a Health Savings Account (HSA) option if you get your insurance through your employer.
These accounts typically have tax benefits such as being able to put in the money tax-free and can generally be used for any medical needs from a co-pay at a doctor’s appointment, to a dental check-up, to major surgery, to any expenses associated with having a baby.
The only downside to this type of Healthy Insurance is that you have a very high deductible.
If you are healthy, and/or/ single or newly married, this a fantastic option.
Before Ross and I got married, he had an account and contributed to it every month until his yearly deductible was met.
(Often if you have one of these accounts through your insurance at work, your employer will also match your contribution when you contribute so it helps you reach your deductible more quickly.)
Once we were married and on the same insurance, I also got an HSA plan through our employer and I contributed the maximum amount that I could every paycheck until we reached our yearly contribution limit.
One of the best things about having an HSA is that if you switch employers, you take the account and the money with you so you don’t lose anything.
With the money we had put into our accounts, we were able to pay for my prenatal care and birth expenses for both of our girls without having to pay our deductible out of pocket. The money was already saved!
I highly recommend having this type of insurance if you are planning to have children down the road and are a healthy person.
Medical Savings Account Option 2
Now that we have children, we wouldn’t want to have a high-deductible insurance plan. Kids get sick a lot more often than adults do and tend to be accident-prone.
After our younger daughter was born, we used the last of our HSA money that we had from our previous employer, so we decided to make our own account.
We are going to open a regular savings account at our bank and treat it like an HSA (unfortunately it won’t be tax-free money, but it will still do the trick).
We will put money into this account every month until we reach our yearly deductible. Then, if we have a medical emergency, we can use it for the bills and replenish the account throughout the following year without having to dip into our emergency savings account.
If you are using the 70/20/10 Rule for Budgeting, once you have the minimum amount in your Emergency Savings Account, you can either put the whole 20% into this account, or you can split the 20% and put 10% in your HSA or Medical Savings Account while you continue to put 10% in your Emergency account until you have the year’s worth of expenses in the Emergency Account.
Sinking Funds
A sinking fund is an account that you put money into when you are saving for something specific, often to replace a depreciating asset like a vehicle.
You aren’t expecting to grow your wealth with these accounts, you are setting the money aside for a specific use.
5) Large Item Sinking Funds
Car Savings Account
A car savings account is for… wait for it…. anything to do with your car!
We get a discount on our car insurance by paying for it bi-annually. It’s great to get a discount, but that means that twice a year we have a large payment. So we divided out the total annual amount into 12 monthly payments and put the payment each month into our Car Savings Account.
Pro Tip: Check with your insurance company to see if you can get any discounts for paying in lump sums!
Then when the payment is due, we have the money sitting in this account ready to go. This way it doesn’t mess up our monthly budget when we have to pay for it.
We also put money into our car savings account for car emergencies. You never know when something will need repairs or replaced. It is always better to have the money ready to use for your car than to have to dip into your Emergency Savings Account.
You can also put some extra money into this account if you want to upgrade your vehicle in the future. Then when it is time for the purchase, you will have the downpayment (or hopefully the full payment!) ready to go.
House Savings Account
If you plan on purchasing a house, it is never too early to start a house savings account.
It’s ideal to be able to put 20% down on a house when you decide to purchase, and this is a great place to build up and store the money!
Having a separate account for the house ensures that you won’t be accidentally using this money for something else and allows you to see how close you are to your goal quickly.
6) Fun Sinking Fund Accounts
Fun sinking funds are great to have for recurring fun items that you would like to set aside money for. These accounts make sure you are also having fun with your money and will keep you from digging into the important savings accounts when you want to do something fun.
I recommend having your Emergency Savings Account set up and funded before opening these accounts. But they are wonderful to have after you reach that goal!
Trip Savings Account
We love taking trips! But vacations can be expensive if you aren’t budgeting for them in advance.
Even though you aren’t generally at home when you take a vacation, you will still need to pay your mortgage/rent, utilities, insurance, and all of your other monthly bills. Food on vacation generally costs more than your monthly food budget too because most people eat out more often on vacations.
The best way to save for a trip is with a sinking fund. Put some money every month into a separate account specifically for a trip or vacation.
Then when you go on a trip, you have the money set aside and ready to go!
If your family isn’t into trips/vacations, you can use have a “fun things to buy” account and use it for a trampoline, a swing set, or a pool for the backyard.
Christmas/Gifts Accounts
Christmas and Birthdays are so much fun, but they can also be expensive!
Especially if you enjoy giving many gifts and doing many activities around each holiday, but aren’t financially preparing for them all year round.
To set up a Christmas sinking fund, figure out how much money you want to spend on Christmas and/or Birthday Gifts through the year, and divide the total amount by 12. Then each month put the monthly amount into the fund.
Savings Accounts For The Future
Sometimes it can be a challenge to save money for something that is so far in the future like retirement or your kids going to college.
But saving for the future is so important. Not only because you want to have some money set aside when you get there, but the sooner you start saving, the more money you will have when you get there!
Due to the time value of money, the sooner you start saving for the future, the better!
7) Retirement Savings
Everyone should have a retirement savings account, no matter how old you are (but the younger you start the better!)
Set aside some money every month for your retirement in a ROTH IRA, a 401K, or other retirement savings account.
If you are a young single person, or a young couple without kids, I highly recommend contributing the maximum yearly amount toward your retirement.
The more money you put into these accounts in the beginning, the more money you will have down the road!
College Savings Accounts (Optional)
If you don’t feel like you should help your children pay for college, that’s completely ok, I’m not going to try to convince you that you should.
There are pros and cons to paying entirely for your children’s college education and you have to choose what is best for your family.
BUT, if you want to help your children with paying for college even a little bit, you should start saving for it now.
College may seem like a long way off, but if you think your children may want to go to college, it is a great idea to set up a College Savings Account now. As in today. Actually, do it yesterday if you can.
Even if you don’t contribute to it, you show them how they can save money for college by using my Simple Budgeting Method for Kids.
You can set up college savings accounts for your children either at a local bank in a regular savings account, or you can set up education-specific funds.
The only downside to an education-specific fund is that it has to be used for continuing education after high school.
So, if your children decide that they do not want to go to college or trade school, you can use the money for some other form of education, but nothing else.
We decided to get education-specific funds for our girls because we want to encourage them to go to college or trade school, and if they don’t, we have nieces and nephews that we could help with their college education.
Even putting $25 a month into an account for college will help soften the financial blow to your children if they decide to go.
We opened a college savings account for each of our girls just a couple months after they were born, and it wouldn’t be a bad idea to do it even before they are born!
Pro Tip: If you have more than one child, open an account for each child. You don’t want to drain all the college savings money on child number one and have nothing left for child number 3. Having an account for each child ensures that each kid gets the same amount of help from mom and dad and no one is crying “unfair!”
Wedding Funds (Optional)
Just like college, weddings may seem far off, but they can be really expensive… and sneak up on you if you aren’t expecting it!
We also opened a wedding account for each of our girls not long after they were born.
We don’t contribute a lot to these accounts because we don’t plan on having more than three to five thousand dollars saved up by the time they get married. We had a very small wedding ourselves and don’t think that we need to provide a lavish one for them, but we would like to be able to help them out should they choose to get married.
If they want more money than that, they can choose if they want to make up the difference.
Even if you have boys it can be nice to help out with the wedding, or give it to to the couple as a wedding gift, or give it to them for a down payment on a house.
We figure if they don’t get married, we can let them put the money towards a down payment on a house or some other wise investment.
Bank Account for Each Child (Optional)
When your kids are little, I prefer to teach them budgeting with this simple cash method for kids, but as they get older, and their savings jar gets full, open a bank account for each child’s personal savings.
You may want to have an account for their spending money as well. But if you open the account when a child is too young, they will have a hard time understanding that their money is still in the bank.
I plan on opening bank accounts for Miss Claire when she is about 7 or 8 years old.
Spare Change Account (Optional)
If you want some incentives for being more frugal with your money and coming in under budget each month, a Spare Change Account is a great option.
A Spare Change Account doesn’t have any money budgeted toward it. You only deposit money into this account when you are under budget in another category and have money left over.
So if you have $100 per week budgeted for groceries, and you only spend $80 at the store, you would put $20 into your Spare Change Account.
The only catch with this account is that you have to use it for something fun and something specific! If you are planning to use the money for something boring, you will have very little motivation to try to be under budget.
If you don’t have something specific in mind for this account, you will just use it for going out to eat again when you don’t feel like cooking. If you have a specific goal in mind, it will make you think before you spend it and force you to decide if you want something now or later.
This is a great option if you have a little wiggle room in each category of your budget and want to motivate yourself to tighten your belt.
It works better for my personality to have a budget where every dollar is accounted for and the money I have allocated in each category makes me be frugal at the store, but this is a great option for other personalities.
Get Creative!
These seven bank accounts are just a starting point. Open as many as makes sense for your family and financial situation!
Let me know in the comments what other bank accounts your family uses and you think everyone should have!
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You pull up your spreadsheets, dust off your calculator, and grab your workbook.
This time it’s going to be different. You’re going to create a budget… and stick with it!
Only, it’s never different. Time after time you’ve tried to get your finances under control, and time after time you’ve failed.
But what if I told you that there were two tricks that you could use to change that?
By making these two small shifts, you’ll be able to stick with your budget and meet your financial goals.
Not only are these tricks super easy, but they will work for any budget.
“Will these tricks work for low-income families?” Yep!
“What about if I just want to save more of my money instead of blowing it?” Yes!
“But we are a single-income family, can it really work for us too?” Definitely!
We’ve been using these tricks since we got married and were living on one very low income. We used it when we were both working outside the home. And we continue to use it today as a single-income family with two kids.
So I would bet you money that it will work for you. 😉
It all comes down to a mental shift
Most budgeting problems can be solved by two tiny little mental shifts.
“Really, Kassy? That’s all it takes? Changing how I think?! That seems too simple.”
I wouldn’t have believed me either, if I hadn’t tried it! But stick with me and you’ll see how this works:
The Two Important Paradigm Shifts for Success
1) Think of your budget in terms of percentages instead of dollar amounts.
When most people start budgeting, they go straight to the numbers. They don’t bother looking at what percentage of their money they are spending, saving, or giving.
They think that the numbers in their budget are fixed and unchangeable. So they let the numbers control them.
Here’s where the shift takes place: If you decide the total amount of money that you can spend on expenses before you begin your budget breakdown, you are in the driver seat.
Not only does using percentages put you in charge, it will allow your budget to work on any income.
2) Reverse the way you allocate your money.
Most often, when people are looking at their numbers, they look at their expenses first.
What’s left after all of the expenses have been met is saved.
And if there is anything left over after that, then they give.
That’s backwards!
If you have an unlimited pool of money for any and every expense you want, your expenses will grow until they drain the pool.
There will never be anything left for savings, and there will never ever be anything left to give.
If saving, paying off debt, and giving are important to you, you must allocate your money in reverse!
So how do you change these habits?
With a little bit of math.
First Things First
If you are new to budgeting, I need to quickly go over a small detail: Gross Income vs. Net Income.
This little distinction will save you so much frustration!
Never, under any circumstances, base your budget off of your total salary or hourly pay.
If you do this, you will be frustrated every month because you will never have enough money to cover your expenses.
It just won’t work.
(If this is boring or obvious to you, go ahead and skip down to How to Use Percentages, I won’t be offended.) 🙂
Gross Income
Your gross income is your total salary or paycheck before taxes.
This is what your employer tells you that you make. But let’s be real, you don’t actually see that amount of money.
If you base your budget off of your gross income, you are making a huge mistake and setting yourself up for lots of frustration and probably failure.
The only time you should worry about this number is when you are job hunting.
Net Income
Net Income is commonly referred to as take-home pay, or what you make after taxes.
Any time I say “income” when we are talking about creating your budget, I mean Net Income.
This is the number that shows up in your bank account or on your paycheck after all of those FICA guys have had a crack at it.
The only exception to the rule is that some people like to base their giving off their gross income instead of their net income, but I’ll explain more about that below.
For now, just know that you should only think about your Net Income while building your budget.
Got it? Ok, back to how these tricks work.
How to Use Percentages to Build Your Budget
When you are building your budget, you can obviously use any percentages that you want… It’s your money after all!
But I’m going to show you the percentages that we have used (and still use) on a variety of income sizes in our almost 10 years of marriage.
These percentages will work if you are just starting out, paying off debt, or have plenty of money coming in!
The 70/20/10 Rule
The 70/20/10 rule is going to give you the most basic structure for your budget.
You’ll decide the total amount for every single item on your budget once we get this structure set up, but be careful not to needlessly increase your expenses as your income grows.
For example, you don’t need to increase your food budget just because you make a little bit more money.
Giving yourself a broader outline allows for you to make adjustments and add things into your budget as needed, without needlessly growing the amount of money you spend on transportation or housing, for instance.
Here’s how it works:
Expenses (Everything it costs you to live): 70% of your income (Take-Home Pay)
Savings/Debt Payment: 20%
Giving/Donations/Tithe: 10%
Let’s get into the details:
Expenses: 70%
When you use the 70/20/10 Rule, your expenses should be less than or equal to 70% of your net income. Never More.
Expenses (<) or (=) 70% of Net Income (Salary-Taxes)
How do you know what 70% of your Net Income is?
Take your Net Income and multiply it by .7. The answer is 70% of your net income.
Example: For easy math’s sake, let’s say your Take Home Pay is $2000 per month.
$2000 (x) .7 (=) $1,400
In this example, $1,400 would be the maximum amount of money you can spend on expenses.
Debt Payment and/or Savings: 20%
The next 20% is allocated to Debt Payment and/or Savings.
Debt Payment/Savings (=) 20% of your Net Income (Salary-Taxes)
So if our take home pay is $2,000 a month. Our Debt Payment/Savings amount would be:
$2,000 (x) .2 (=) $400
If you don’t have any pressing debt, this money goes directly into savings.
If you are just starting out, begin by building up an emergency savings account (check out this post for how many savings accounts you should have to easily manage your money).
How to Handle Debt:
If you have any debt, your first order of business is to get rid of it! Preferably as quickly as possible.
Use this 20% of your income as additional payments on your debt until the debt is gone. Then go back to putting this money in savings.
Notice that I said additional payments. Your car payment(s), your student loan payment(s), and your mortgage should all come out of your expenses. This 20% of your income is for extra payments!
I’ve found that everyone has different logic as far as good debt/bad debt qualifications. You have to decide for your family what is important for you to pay off.
But here’s the thing, any debt that you can pay off is more money that you will have at your disposal each and every month from now until eternity.
“Say What?!”
Yep, it’s true.
Think about it:
Every car payment you make could actually be going into a savings account for that amazing family vacation you’ve always wanted to go on.
Every credit card payment could be saving for a kitchen remodel.
Every student loan payment could be allowing you to stay home with your kids.
Here’s How We Handle Debt:
Like I said above, you have to choose what debt is worth it to you to pay down.
In our family, these are the types of debt we would pay off quickly: (And when I say quickly, I mean we throw every bit of money we can find at it until it disappears.)
Debt We Paid/Pay Off Quickly:
Student Loans:
A lot of people consider student loan debt to be good debt. We didn’t.
We did the math and realized how much extra we would be paying on our loans if we made the minimum payment every month for years on end.
We paid off our loans as quickly as we could and saved ourselves thousands of dollars in interest.
That’s a lot of mulah that we now get to keep in our pockets!
Paying off our student loans is one of the main reasons I am able to stay at home with my girls without having to worry about making a full-time income.
Car Loans:
A lot of people think that having a car loan is a fact of life. Again, we don’t.
We only purchase cars that we know we can afford to pay off within a year. Worst case scenario, we know we can do it in two. Then we drive that car until someone else totals our vehicle… It’s happened twice now.
Not having a car payment is another reason that I am able to stay home with my girls. So it’s worth it to us to pay our cars off quickly. Then to drive them until they die.
Credit Card Debt:
Credit Card Debt Payments would belong in this category as well.
If you tend to get into debt using credit cards, pay the debt off quickly… after you cut the cards up and throw them away.
Don’t get any credit cards again until you have all your debt paid off and have a handle on your spending.
We make money off of our credit cards because we only use them when we know we can pay off the balance at the end of the month… then we take the rewards to the bank!
The reason we chose to pay off any debt quickly was that we had a goal of becoming a single-income family when we had kids. Not having debt gave us the freedom to do that.
Pro Tip: If you can pay extra money, make sure every penny is going against your principal amount only and not toward the interest on the loan. You will pay it down a lot faster that way!
Don’t just make double loan payments when you’re paying off debt!
Debt we don’t pay off quickly:
Mortgage Loans:
The reason that we aren’t paying off our mortgage quickly is that we were transitioning to a single-income household when we purchased our home.
While we were careful to purchase a house that we could afford on one income, it would be a big stretch for us to make additional payments on our income.
Even if we were able to make extra loan payments, it would still take us a very long time to pay off our house.
For us, it was more important to spend the money that we would have been using to pay off our mortgage on swimming lessons, music lessons, and a family vacation here and there.
But if you can afford to pay off your home and it is a priority for you, go for it!
You need to evaluate your debt for yourself and your family. Pay off what you can, and make your regular payments on the rest.
Giving: 10%
In our family, we tithe 10% of our income to our church.
If you don’t belong to a church, or you don’t want to give to your church, there are other things that you can do with this 10%.
Give to a charity, find a cause, or help someone pay for college… Get creative and give back.
No one ever regrets giving to charity and making the world a better place.
Obviously, you aren’t required to give any of your money away, it’s your money.
But I highly encourage you to do something with the money that is bigger than yourself, even if it is just putting the money into a college savings account for your own children.
For our $2000 net income example, we have been using, the charity amount looks like this:
$2,000 (x) .1 (=) $200
Gross Income vs. Net Income Giving
Now, remember when I told you that you could give off of your gross income (your total salary) instead of your net income (your take-home pay) if you wanted to?
Some people, ourselves included, choose to give this way.
(Don’t worry, I’m not going to try to convince you to do this. You should do whatever seems right to you.)
But I wanted to walk you through the process in case you wanted to give this way as well.
Your numbers won’t work out beautifully if you do this. You can’t give 10% of your gross and still expect to spend70% of your income on expenses and 20% of your income on savings.
Something else will have to give.
If you choose to give 10% of your gross income, I suggest you take the extra giving out of your expenses instead of your savings.
Here’s How You Do The Math:
Calculate your Giving:
10% of your Gross Income in this scenario
Calculate your Savings:
20% of your Net Income
Use the Remainder for Expenses:
For us, this works out to be about 67% of our net income for expenses.
If you prefer to use the nice round numbers of the 70/20/10 rule, you will have to do everything based off your net income.
Now Think in Reverse
Each month when you allocate your money into each category, I want you to do it backward!
1) Give First
Take your 10% of each paycheck and make a payment to your church, charity, cause of choice, or college fund.
Do this before you do anything else!
Why do we give first?
If we wait until the end of the month and give last, there won’t be anything left to give. Everyone is naturally selfish and if we don’t set aside the money that we want to donate, then there won’t be anything left at the end of the month.
Money has a way of sneaking away undetected if we aren’t intentional with it.
2) Pay off Debt and Save Second
The same logic applies here. If you don’t pay yourself next, you won’t get around to it!
Twenty percent of your income won’t be magically sitting around at the end of the month waiting to be saved.
Have your money auto-draft to your savings account or have an automatic loan payment set to go out the day you get your paycheck (or the day after you get paid, just to be safe, you don’t want to overdraw.)
Pretend that the money never existed!
3) Use the Remaining 70% or less for your Expenses
Now that the important stuff is out of the way, use your remaining 70% to live on.
The last thing you really want to spend time doing or thinking about, right?
We all know we should do it, but it’s usually the last thing we get around to.
It’s like the vitamins of home management.
Here’s the thing though, budgeting can actually be fun!
I feel like you don’t believe me, so let me show you:
Wouldn’t it be fun if you could afford to take that trip you’ve been dreaming about?
Wouldn’t it be fun if you told your money where to go instead of credit card debt bossing you around?
And wouldn’t it be fun if at Christmas time, you already had the money saved up for gifts instead of digging yourself into a financial hole?
Budgeting can make all that happen!
Yes, it takes some time, some effort, and some grit to stick with it.
No, it isn’t easy at first.
But when you pay off that first debt, when your savings account starts growing, and when you stop spending money on things that you don’t need, it is all worth it!
Before we get into the HOW of building a budget, let’s take a quick look at WHY you should start a budget, in case you still aren’t convinced.
Or if you’re ready to get started, just skip the next section. 🙂
And if you prefer to watch your content instead of read it, here is the video that goes with this post:
Why You Should Start a Budget
1) You Will Get Your Spending Under Control
If you spend more than you make each month and money seems to magically disappear between your paychecks, starting (and sticking with!) a budget will help!
When you have your money allocated to where it needs to go, you know exactly how much money you have left over to play with each month.
Basically, it keeps the money from getting confused as to whether it is fun money or serious money.
Creating a budget will help you see exactly what you are spending your money on… and see if you need to make any adjustments.
Having Netflix, Hulu, and Amazon Prime may be nice, but would it be better if you could afford better gifts at Christmas time if you only subscribed to one entertainment hub?
2) You Will Reach Your Goals Faster
Do you have a trip you want to go on? A car you want to purchase or pay off? Are you thinking of purchasing a house and need a down payment?
Start that budget!
By laying out exactly how much money you need to save and dividing it up into nice manageable chunks that you can save each month, you will reach your goals more quickly.
3) You Will Save More Money
Putting your money toward an emergency savings account or retirement can be a challenge when you are budgeting based on your feelings every month.
Going out to eat will always win over putting that money in an account when you don’t have clearly defined goals.
But when you write down your goals on paper, and auto-draft directly into your savings account(s), you will start to build a nest egg for when you need it.
4) You Can Stop Living Paycheck to Paycheck
Living paycheck to paycheck is frustrating and stressful.
No one enjoys living that way without any financial cushion.
Knowing exactly where your money should go each month will give you the courage to say, ‘no’ to things that aren’t in the budget so that you can begin to build in some wiggle-room.
5) You Can Be Flexible from Time to Time
Sometimes, the kids will need a whole new wardrobe, and usually they all need it at the same time.
If you have a budget though, it’s not a problem!
Just eat cheaper foods for a month, or cancel some subscriptions, or put a little bit less into the college savings accounts.
If you know how much money goes everywhere each month, you can easily move things around temporarily if need be, without completely throwing things off track.
6) You Can Get Back in the Driver Seat
Sometimes it can feel like your finances are in control of you, especially if you are in debt.
By creating a budget, you are back in control.
You can allocate where every bit of money is going and know when your debt will be paid off if you stay on track.
7) Having a Budget Keeps You Accountable
Building a budget, is like having a financially savvy friend who will say, “do you really need to buy that cart-full of things at Target? Or have you already spent your shopping budget for the month?”
It may not be what you want to hear, but you know that your friend is right.
Sometimes it’s just what you need to kick your finances into gear.
8) Having a Budget Simplifies Your Finances
Even though it seems more complicated at first, once you get the hang of it, it will make your finances simple.
Especially if you use my simple percentages trick that I talk about in this post, you will be amazed by how easily you can keep track of your money.
You will know where every dollar is going and never wonder why your credit card bill is so high again.
9) Money Will No Longer Get “Lost”
Have you ever put money in your bank account and had it “disappear” less than a month later? You aren’t even quite sure what you spent the $100 you got for your birthday on, but it must have been something, right?
Having a budget and sticking with it will keep you from spending your birthday money at the Taco Bell drive-through and enable you to use it for something fantastic. (That’s never happened to me by the way…)
How to Create a Budget:
Now that we all understand why creating a budget is so important, let’s go through the simple steps for creating a budget!
1) Grab Your Gear
We are kind of spreadsheet junkies. We have a spreadsheet for everything… from every board game that we own, to our Christmas card address list.
So for us, it’s a no-brainer to grab our laptops if we are looking at our budget. We like to use Microsoft Excel for all of our spreadsheets, and I built aMoney Mastery Google Spreadsheet to get you started on the right foot if you’ve never used spreadsheets before.
The advantage of using a spreadsheet for your budget is that you can easily change the numbers if anything changes without having to completely re-do the math.
If you use the formulas, the spreadsheet does the math for you!
But if paper and pen is more your style, it is also a great way to build a budget. You can grab my Money Mastery Printable Workbook if you would like an easy plug-and-play template.
2) Determine Your Reliable Monthly Income
Take your income after taxes, your spouse’s income after taxes, and any other consistent incomes that you have (after taxes!) and add them all together.
The sum of the net incomes is the amount of money you have at your disposal every month.
Notice that we aren’t looking at every bit of money that you *might* make in a month.
What you want to know is what will absolutely be at your disposal.
Be very sure that you are not looking at your Gross Income. That number is quite different than the cash flow you will have available after all of your deductions are taken out.
3) Write Down All of Your Monthly Expenses
Grab your Workbook or Spreadsheet and write down every bit of money that you spend in a month.
Jot down anything you can think of from how much you spend on eating out, to your mortgage or rent payments, to your Netflix subscription.
If you get stumped, your credit card or bank statements might offer some inspiration.
Be specific.
Then add everything in each category together and write it down. (You’ll find a list of categories in the Workbook and Spreadsheet.)
How to Budget for Food
The food category can be tricky for some people because their eating habits vary greatly from week to week, or because they typically eat out and they want to start eating at home more to save money.
If you fall into either of those categories, you have three options:
1. You can track how much you spend on food for a month before setting your food budget in stone.
2. You can make your best guess and adjust after the first couple of months if you need to.
I used to make a specific recommendation for how much money you should spend on your budget ($100 per person/per month).
BUT in this video I talk about how food costs have gone up since COVID. I now think that you should try to set your food budget as low as you can while still making tasty, healthy meals for your family.
Adjust the number according to your geographic location (I know some places like Hawaii are much more expensive to buy groceries), and your eating preferences (or dietary restrictions). But don’t be afraid to challenge yourself with spending less money!
When you are all done writing down everything you spend in a month, add up all your expenses. Are your expenses 70% or less of your net income?
(If you aren’t sure what 70% of your net income would be, simply multiply .7 by the total net income that you came up with in Step 2. Then compare your answer with the total expenses.)
If you are spending more than 70% of your net income, you are probably going to need to cut some costs in order to be able to save money or pay off debt depending on your goals for creating this budget. We’ll, take a closer look at this later.
Why divide your expenses into two categories? I thought you’d never ask!
After doing all the math. you may find that you don’t have the money to put into savings that you would like to. Or you may be looking to pay off your debt quickly but aren’t sure how you will do that. Or you may want to save for a trip. Or you may find that you are spending more than you make and are getting deeper into debt…
If that is the case for you, then you will probably be looking at cutting some expenses (after you track your spending for a month in Step 8). Dividing your monthly expenses into these two categories will make it easier to see what you can live without.
Necessary Expenses
Everything you put in this category is a non-negotiable expense for your family. You won’t be able to minimize or cut out these expenses without moving or drastically changing your eating habits.
Common things that you may have in this category are Rent/Mortgage, Utilities, Debt Payment, Cell Phone Plan, Groceries, Car Payments, Car Insurance, Home Insurance, Health Insurance, Life Insurance, and Gas.
Unnecessary Expenses
Now jot down everything that is a typical monthly expense that you can either spend less on or cut out completely if you need to.
This is the list that you can work from if you realize that you need to make some adjustments.
It’s hard to minimize necessary expenses (although not impossible if you are willing to put in some work), but unnecessary costs can easily be shrunk, skipped for a month or two, or completely eliminated if you are in a less than ideal financial situation.
Things that could possibly go in this category: Clothes Shopping (most of us don’t need as much as we think we do), Miscellaneous Shopping, Entertainment, Going out to eat, Television/Cable/Dish, Netflix, Hulu, Amazon Prime Subscriptions (even though Amazon wants us to feel like Prime is a necessity).
You’ll be surprised how easily you can live without so many of these things!
5) Allocate Your Savings/Debt Payments
Why is this section about Savings and Debt Payment together? Because if you have debt (other than a mortgage), pay it off before you start putting money into savings.
Once the debt is paid off, you use the money that you had been putting toward your payments and start putting it into your savings accounts.
If you try to save while you are paying off debt, you won’t make progress with either of them very quickly and will probably get discouraged before you are done.
But if you pay off your debt first, you are able to put moremoney toward your debt and pay it off faster. Then your savings will grow more quickly when you can put all of that money toward savings.
For this step, you should decide what percentage of your income you would like to save or put toward paying off your debt.
In our budget, this category accounts for 20% of our net income. When we had/have debt, we use this chunk of money to pay it off. When we don’t have debt, we save 20% of our income.
What To Do With Savings:
Instead of dumping your savings into one giant catch-all savings account, I suggest dividing it up among several different accounts.
The main reason for this is that it is much easier to track the money we have saved for different items or experiences without dipping into our emergency fund.
If you decide to have several accounts for your savings, I recommend using a separate tab in your spreadsheet to keep everything straight.
Here are some savings accounts that we have and I would recommend to anyone that they apply to:
Emergency Savings Accounts: This account is for emergencies such as a job loss or a medical need. Don’t touch it unless you are in a crisis. It is best if you can pretend this account doesn’t even exist.
Set up auto-drafting for this account on the day that you know you get paid.
It is a good idea to have 6-12 months of living expenses stored in this account. If you are just starting out and don’t have a savings account yet, put the entire 20% of your income into this account until you could live off of this account for at least 6 months if you needed to.
Big Goal Account: If you know that you plan on purchasing a house, boat, car, going on a trip, or paying for a wedding; it is a great idea to save money ahead of time.
Putting all your savings into one account can make saving for a goal messy. By having a separate account, you know exactly how far you are from your goal.
If you have more than one goal that you are saving for at a time, open two accounts! Opening accounts won’t hurt your credit or cost you anything as long as you maintain the required minimum balance.
Investments: It is a good idea to put money into investment accounts for retirement needs. Often long-term accounts will have higher interest rates than your run-of-the-mill savings accounts.
We use Edward Jones to keep track of putting our money in the highest yielding investments so that we don’t have to watch the market so closely.
Sinking Funds: These accounts are what we use to save for expected hits to our bank account. For us, this is mainly our cars and insurance.
We use Progressive Insurance and with them, we can save money by paying yearly for our insurances instead of every month.
To avoid a financial surprise once a year, we divide the total amount we need to pay into 12 smaller payments. Each month, we put 1/12 of the money into an account. When our premium is due, we have the cash available.
We also use our sinking fund for car repairs and oil changes. Ross averages out what we need for these each year and puts the money away to take care of the vehicles… plus a little extra since car repairs can come at a premium and usually happen when you least expect them!
College Savings Accounts: Each month we put a little money into two college savings accounts. One for each of our girls. Any time Ross gets a bonus from work, we also put in a little extra.
Most likely the accounts won’t completely pay for their college educations, but it will give them a nice start when the time comes.
Considering the time value of money, it is best to start these accounts as early as possible when you have children.
The accounts that we use for our girls are for education only. The upside of that is that they have a higher interest rate than a regular savings account. The downside is that they can only be used for trade schools or college.
So if neither of our girls decides to go to college, we will have to transfer the money to someone else who wants to use it for education. This is worth it to us because we figure that worst-case scenario we could give it to a niece or nephew.
If you want more ideas for setting up different savings accounts, check out this post!
6) Determine Your Giving
You can obviously skip this piece of the puzzle if charitable giving doesn’t align with your personal values.
But if you’ve never done it before, I encourage you to give it a try!
It’s ok to start small here, even donating $25 a month to a cause can go a long way. Just eat at home once or twice more per month instead of eating out and it will cover the cost.
Even if you aren’t part of a church, it never hurts to giveback to your community. Find a cause or a charity that you are passionate about.
I’ve never heard of anyone who regretted paying it forward!
If you really can’t afford it, volunteer once a month at a homeless shelter or soup kitchen in your area!
There are a million ways to give back if you get creative.
Plus volunteering will teach your children the importance of helping those less fortunate than yourself and treating everyone with respect.
In our house, we tithe 10% of our income to our church. (See this post for more information on recommended budgeting percentages.)
Additionally, we like to donate to ADRA which supports people who live in less fortunate areas of the world or who are in difficult situations.
We like to get the kids involved in choosing how we donate and they often like to pitch in by asking for donations for Christmas and birthdays. This year we bought a goat for a family who needed food and a way to make money.
7) Create a Calendar for Your Budget
Sit down with your calendar (I love this Amy Knapp Big Grid Calendar) and write in your paydays. Now, choose which payday you will have your expenses auto-drafted.
For example, We have our mortgage payment taken out on the first of the month with the first paycheck. Because of that, we have most of our other expenses drafted after the other paycheck hits our account.
That way we have plenty left over for groceries and gas in between paycheck one and paycheck two.
After you have your expenses divided up, decide when you want your savings or debt payments auto-drafted. You may want to do this all at once, or a little bit from each paycheck.
Having this money taken out automatically tricks your mind into forgetting about it!
The other thing you should write down on your calendar is your weekly grocery budget.
Divide your monthly grocery budget by 4 and write it down. It is much easier to stay under budget when you know how much money you have to spend each week at the grocery store, instead of trying to remember the monthly amount.
8) Track Your Spending
Alright, now that you know where you want your money to go each month, it’s time to find out where it is actually going each month.
If you needed to cut some costs, track your spending for another month. Then see if the initial things that you cut out of your budget were enough for you to meet your goals.
If you are still spending too much, keep repeating steps 8 and 9 until you get where you want to be!
If you find yourself struggling to stick to your budget, you may want to use a cash system until you have your spending under control.
But I don’t recommend using a cash system in the long run because you can build credit and make money by using credit cards… if you use them wisely.
Using a cash system is a great way to reset your spending if you need it, though!
11) Stay On Top of It
Once you have honed in on your perfect budget, don’t just forget about it. Check your budget regularly against your bank accounts to make sure you aren’t overlooking any spending.
We love using Mint.com to stay on top of our money. It saves lots of time, and it’s free!
I recommend checking at least once a week, but it doesn’t hurt to check daily while you are getting into the habit. Or you can be super-cool like Ross and check multiple times a day from now until forever.
I always play a game with myself whenever I buy anything other than groceries to see how long it will be before I get a text from him confirming that I did indeed purchase whatever it was from wherever it was.
It used to annoy me until I realized that’s one of the reasons we have been able to live debt free for so long… and it was a helpful habit to have when someone stole our credit cards…but that’s a whole other story!
The important thing to remember is to check frequently, whatever frequently means to you!
Determine Your Monthly Net Income: Add all reliable monthly net incomes together.
Write Down All Monthly Expenses: Write down everything you spend money on in a month from your debt payment to buying toothpaste.
Divide Necessary From Unnecessary Costs: In one column write down everything you can’t live without, in the other, write everything that you might be able to adjust if you need to.
Allocate Your Savings/Debt Payments: Put 20% of your Net Income toward paying off your debt first. After your debt is paid off, build up your savings accounts.
Determine Your Giving: Decide where and what amount you will give to charity.
Create a Calendar for Your Budget: Write down when you get your paychecks. Then determine when your expenses/savings/debt payments/charitable giving will auto-draft.
Track Your Spending: Write down everything you spend for a month.
Evaluate and Cut Costs: How did you do with sticking to your budget?
Track Again: If at first you don’t succeed, try, try again.
