How To Start A Family Budget That Really Works In 7 Easy Steps

Budgeting for my family has been a roller coaster ride. Until I created a values-based budget. Finally, I was able to create a budget for my family that really worked. To this day, it still does.

In this article, I’ll show you how to create your own values-based budget for your family in 7 easy steps. I regret that this was not the first budget I tried. That‘s why I want to share with you my personal journey towards budgeting with purpose and why I first failed at it. This way you know the common mistakes to avoid for a smoother budgeting journey.

If you have never heard of the values-based budget before, you might want to check out these 2 blog posts about How I Spend My Money On What Matters Most & Skip The Rest and The Ultimate Budget For FIRE: A Frugal Values Based Budget. In these posts I explain everything you need to know about the values based budget. Also, I talk about how you can apply the concept of frugality within it if that resonates with you.

What are the benefits of a value-based budget?

The purpose of any budget is to be aware of the relation between your income and your expenses. That’s the baseline for any financial planning (and wealth management if that’s something you aspire). This way you can start managing your money to live the family life you want while achieving your personal financial goals. And here comes the problem. Budgets typically focus on spending by category and set spending limits. Of course that feels highly restrictive and limiting. But, it doesn’t have to be that way.

The biggest benefit of value-based budgeting is that it no longer feels restrictive. That’s because values-based budgeting doesn’t teach how to cut expenses, but rather what is worth spending money on and what isn’t. That is highly personalized depending on your unique lifestyle choices (reflecting your lifestyle preferences). Some love spending money on food or fashion while others want spending money on bikes or weekend trips. The point is that you need to get awareness of what you don’t value or even regret spending money on. Then financial prioritization happens automatically.

I myself started spending more money (yes, more money) on the things I love (like organic food or books I don’t get from the library). And I stopped spending money on things I will regret (like toooooo much clothing, especially for my little girls). Still, it happens. But much less and I am much more aware of it. This is how I finally created a budget that reflected everything I wanted and it works just fine. But first I failed at conscious spending and value-driven decisions when it comes to my finances. My money mindset was a bit extreme.

Why I first failed at budgeting with purpose

If you follow this Blog and our family‘s journey for a while, you know that we want to achieve FIRE – Financial Independence Retire Early. We share more about us here (and the why behind our family‘s dream of early retirement). One of our biggest struggles on this journey was budgeting.

When we decided for FIRE we became obsessed with trying to save a lot of money to invest a lot of money into the stock market. So, we created a budget focused on maximizing our savings. That was the whole purpose. We quickly saved and invested hundreds to thousands each and every month. But, after getting our second child it was next to nothing. And it remained this way for almost 2 years!

Now, I could argue that right after giving birth to my second child, inflation climbed up to almost 7 %. And, it remained at this level for those 2 years of my parental leave. Who would have thought. Also, I got only little money as parental allowance for those 2 years. Our budget was tight. I did not expect to invest much money.

But, the actual reason of not saving and investing our money into the stock market at all for 2 years was another one. If a budget’s purpose is just to save money (without any other purpose behind), it will fail. And so, my budget failed. There was a reason for that, but it took a while until I understood why.

What to ask before your first values-based budget

The crux was that when we decided for FIRE we simply wanted to save and invest A LOT of money to hit our FIRE goal faster. But, saving just to save is not sustainable for the long-term. You have to stand behind the goal of saving that money in the first place. And with this goal, I don‘t mean the goal to achieve FIRE. I mean the goal to live differently. This is very important when you want to develop a sustainable spending approach for your family.

For instance, my husband and I felt the urge to change something about the way we eat (while saving money as our expenses weren‘t reasonable anymore). But, I never really thought about what matters to me when it comes to food. How exactly do we want to save money on food while eating healthier using a certain strategy? How does this help us to live differently? We never asked that.

Instead, we tried to cut costs like crazy on groceries while eating healthier food. That was difficult. Not because it‘s not possible. It totally is (I know this today). But, because we never asked ourselves how we actually wanted to eat. That should have been our first question: What‘s important to us when it comes to the food we want to eat (what are our values)? But it wasn‘t. And you can basically ask yourself this question for every expense area in your life.

How We Started To Define What Matters Most

So, we ended up trying food sharing and food saving: Marc gets free food from the local supermarket before it ends up in the trash. We became members of a farm itself which is called community-supported agriculture. And we tried some more food strategies. We could have prevented all of that trial and error by asking HOW we want to eat as a family before we go after a certain strategy.

Today, we have figured it out. We want to eat real food and non-processed food. Also, we want to grow our own food as much as possible. The taste is just incomparable. And, if that is not possible, we want to buy from local farmers primarily. We developed a real passion for farming, self-sufficiency and home cooking.ay, we figured it ou

Once that was clear, we could quickly picture our path to saving money on food while eating healthier. We started a self-sufficient garden even if we have a quite small garden. We defined a time block in our day for gardening and home cooking. Our girls are with us. Sometimes, they want to be involved (mostly when I make chocolate cake). Sometimes, they just want to play in the same room or in the garden. However, I recognized that they argue less during that time. I really feel that this new routine adds significant value to our daily life as a family.

First defining how we want our family life to change for the better (while saving more money) was a game changer for us. We adopted that to every expense area in our life. Because, every time we spend less money we get much more in exchange. We live healthier, more full-filled and more at peace with one another. Specifically, when it comes to spending money for our kids we changed our approach. And, it feels almost relieving. I share my personal journey in the blog post The Ultimate Budget For FIRE: A Frugal Values Based Budget.

The 7 Easy Steps To Your First Values-Based Budget

I hope my experience motivates you to give the values-based budget a try. You can do this in 7 easy steps to create a values-based budget for your family if you do this for the first time:

1. Step 1: Defining What Matters Most
2. Step 2: Set Up Value-Based Sinking Funds
3. Step 3: Creating Your First Family Budget That Reflects Your Priorities
4. Step 4: Spend More On What You Love & Less On What You‘ll Regret
5. Step 5: Tracking & Reviewing Your Budget
6. Step 6: Overcoming Challenges In Values Based Spending
7. Step 7: Adjusting Your Budget As Life Changes

Before we start, we need to talk about the baseline for being successful at any budget. You need to know exactly where your money is going. Most people think they know where their money is going but when looking at their real numbers they are surprised (I was). So, if you never tracked your expenses, I highly encourage you to find a free resources out there to help you get started like The Budget Mom.

We ourselves practice tracking and budgeting our money for > 10 years now and have learned one thing or two along the way. Marc is about to publish an article series on exactly how to start tracking and budgeting as a couple (and the pitfalls to avoid). However, we love using YNAB. It‘s an online app to track and review expenses. This money management tool cost only little money and is worth every penny. Once you know what you spend you can start budgeting.

Step 1: Defining What Matters Most

What do you personally value most and what not? Ask yourself: What are the 3 main areas in my life I actually care about? Get really specific here. We shared our family‘s core values in detail in this blog post The Ultimate Budget For FIRE: A Frugal Values Based Budget. In a nutshell: health, family and personal growth.

Whatever yours are, we want to combine that with your finances. I have 5 intense questions for you (some I shared in the blog post mentioned before):

1. When does spending money bring lasting joy and value (for you, your partner and your kids)?
2. What are the things you don‘t want to give up spending money on (that makes you feel excited when thinking of it)?
3. What could you skip (as you maybe even regret spending money on)?
4. When are you the happiest?
5. When are your kids the happiest?

You may notice that it’s not the moments when we spend a lot of money that bring us lasting happiness and joy. That doesn’t mean you’ll never create those moments for your family again. But it can mean creating more scope for spending less. So, gain clarity about what matters most and what you love to spend your money on. We want to keep that in your budget. Let‘s see how because here comes the trick.

Step 2: Set Up Values-Based Sinking Funds

What is a sinking fund? If you build a sinking fund you put aside a determined amount of money for a specific amount of time each month during the year. Once you saved up all of the money you funded your goal and can access the money. A well-known example for a sinking fund is a Christmas fund. Sinking funds help us to be financially prepared for certain expenses that come up regularly.

To define the sinking funds that are important for you, look at your identified values and goals. For instance, healthy eating matters a lot to our family. After we decided for a self-sufficient garden we knew that we need some money for that. So, we set up a sinking fund for gardening. Each month we put aside some money until we saved up enough to buy a certain supply (primarily second-hand).

Which value-based sinking funds could you think of? If you have already identified your family’s core values, defining the respective funds is actually quite easy. Common examples are a family vacation fund, a seasonal (or special) events fund, a kids clothing (& shoes) fund and a children’s education or college fund. Maybe you want to buy your kids clothing second-hand (as I do twice a year), but have not yet taken care of it financially. That’s okay. Now is your chance to be financially prepared when the next season (and children’s clothing bazaar) arrives.

If you want to set up a value-based sinking fund just open up another bank account and transfer money into this new account. Ideally you set-up an autmatic savings plan so that you do not even see that money when you get your paycheck. This is what we do. This way we make sure to not touch that money.

Step 3: Creating Your First Family Budget That Reflects Your Priorities

If you create your first budget ever it can be tricky to figure out where to start. Especially if you want to directly start purposeful budgeting according to your spending priorities. Here is a list of the 5 steps you need to take and a FREE calculator (I wish I had had when I created our first family budget):

1. Listing income and expenses (after tracking your spendings for at least one month)
2. Defining ESSENTIAL expenses using a FREE Calculator (see below)
3. Categorizing expenses based on identified values (needs vs. wants)
4. Allocating funds to different categories (needs vs. wants)
5. Our example healthy eating

I highly encourage you to use our FREE Calculator, the Simple Bare Bones Budget. It is a budgeting template that you can customize by getting a free copy of it. You will find a list of essential expenses that most families have. This will help you figure out what you NEED to spend money on to survive. What bills do you have to pay? Everything else is a want. You can list these at the end of your budget. Now your job is to allocate how much money you are currently spending on your essential needs versus wants. Additionally, you will want to write down the value-based sinking funds that you have defined.

A great hack to create financial room in your budget is to round down your income (like from 3.270 to 3.200 Euro) and to round up your bills (like from 17 to 20 Euro). Also, we want to avoid setting spending limits for any expense. It is important to write those down. But at the end of the month it doesn’t really matter how much money you have spend in what category. It only matters that you had spend your money according to your values and tracked and reviewed your expenses. I promise you, that just by being aware of where you’re money is going you will start questioning your spendings and redirect those.

Step 4: Spend More On What You Love & Less On What You‘ll Regret

Now is the time to put this budget into action. You want to critically review your budget, which reflects your current expenses (especially if you’re in the red). You can do this in 3 steps:

1. Identify areas where you want to cut back on your spendings as they don’t align with your values.
2. Define strategies to reduce or eliminate these costs.
3. How can you redirect these savings into your personal value-driven sinking funds?

That is a painful process, let me tell you. For instance, I realized that I had been spending way too much money on my kids clothes and toys. Even if I bought everything second-hand, it was still money with no real value. Too many things are either unused or barely used in our home.

My strategy to stop this was to declutter first. That was just crazy. And it still is. I literally drown in things. I even discovered unpacked boxes that I had forgotten. From now on, I decided to make a list of the things I really need for my children. That in itself drastically reduced my spendings. I redirect the money I save here into investments (for our family’s goal of achieving FIRE). I couldn’t be happier today and I cannot tell you how super cool that feeling is. I bet you will go through that same process even if your spending challenges are certainly different than mine.

Step 5: Tracking & Reviewing Your Budget

This is another quite painful process, especially in the first months and year of budgeting. Achieving financial integrity or in other words a consistency and permanent correlation between your spending habits and your values takes time. So be kind to yourself as you track and review your spending.

Our favorite online tool for tracking and reviewing our budget (income and expenses) is Ynab. But you can also find free tracking tools online like The Best Budget Apps for 2024. Whatever tool you choose (you could also do it on paper or in an Excel spreadsheet on your computer), just make sure you do it.

Additionally, regularly reviewing your budget and goals will help you stay clear about where you are right now. Most people like to review their budget monthly. But if you’re just starting out (and can find the time to do it), do a budget review once a week or at least every two weeks. 20 to 30 minutes are enough.

Step 6: Overcoming Challenges In Values Based Spending

The most common obstacle families face when trying to align their spending with values ​​is breaking current spending habits. That’s because most of us just spend money. We never learned intentional spending or just mindful spending that is aligned with our priorities and financial goals. One of the reasons is that many of us forgot intentional living itself.

For example, I struggled a lot with budget alignment because of my impulse buying. That’s why I’m sharing my journey on How To Stop Impulse Buying And Save Money In 2 Simple Steps. And yet there are still enough days when I have to make an effort to stick to my shopping list. It’s hard to break the spending habits we’ve developed over years (if not decades). But I learned a trick that helped me a lot personally.

Being aware of what I already have was a game changer. I just look at what I already have and immediately question any planned purchase. For example, my children and I already have a lot of stuff (clothes, books, toys). It really helps to look at all of this before I go on a shopping trip. Sometimes, I even cancel the trip. Sometimes I have to go through my stuff to figure out what I might already have (so I don’t accidentally buy the same thing – that already happened).

But it’s different when it comes to food. We already have so much food at home. In the freezer, in our basement, on our shelves and in the fridge. But it doesn’t help me at all to look at the food before I go shopping. I need to go through this food before I write my grocery shopping list. This way I only buy what I need to fill in the gaps so to speak. We also have a list of what we need to buy weekly or bi-weekly, such as milk, bread or vegetables and fruits. Before I go shopping, I look at the list and quickly check what we might already have and what we really need and are about to run out of.

You can apply this strategy of being aware of what you already have (in your home) to almost any area of ​​spending. At least for me, awareness has always been and continues to be the first step in changing my spending habits.

Step 7: Adjusting Your Budget As Life Changes

I can’t tell you how many times I’ve adjusted our budget because our circumstances have changed. Sometimes there were certain life events that caused this (e.g. the birth of another baby). In this case, it was very helpful to plan our finances in advance before life is about to change.

What helped me the most was creating our budget month by month as our income and expenses vary from month to month. If you want to do the same, you can use our Bare Bones Budget Calculator. This calculator is by far the only calculator I use every few months, as I regularly adjust our budget as our family life changes (which is more common these days for my family).

What I’ve learned after >10 years of budgeting as a couple is that I need to take the time to talk to my husband about our finances and the values ​​they should reflect. Otherwise, I will not make a values-based decision when adjusting our budget. As mentioned, this happened to us painfully on our food journey. I want to prevent this from happening again. Maybe you share a similar experience and can relate.

Further Resources

If you want to further explore the values based budgeting approach, I can recommend additional resources that I have listed in this the blog Post How I Spend My Money On What Matters Most & Skip The Rest.

However, I hope this post inspires and motivates you to start creating your own values-based budget. I truly believe that if you try, your money can do more than it can now. And you can provide your family, especially your children, with everything you want without jeopardizing your own financial future and long-term goals (like our of achieving financial independence and early retirement).

When you walk away today with at least one new idea to improve your personal financial journey towards F.I.R.E., I’d love to show you some more in the next post. If you haven’t already, you can apply to become a part of the community to not miss any new release. For that you can subscribe to our Newsletter below in the green footer.

Now, I’d love to hear from you: what is your experience with budgeting and value-based spending? What tip can you share with others out there seeking for help? Let me know in the comments below.