Budgeting for Blended Families: Setting Your Finances Up for Success

If you’re like most people, you probably cringe when you think about creating a budget. It can sound so restrictive and boring. And trying to stick to a budget? Forget about it! Any excitement over planning your future goals and life together quickly fades as you deal with the day-to-day realities of money management.  

Exciting or not, in a blended family, a budget plays a critical role in creating family unity and helping to properly account for some of those extra complexities that blended families experience—like child support, alimony, and expense planning with a co-parent.

Fortunately, a budget can be as in-depth or as simple as you want and need it to be. Looking to get better control of spending? A zero-based budget where you track every last penny can help. On the other hand, if you’re on a decent track and just need to fine-tune your spending based on your new family dynamics, a budget that prioritizes high-level categories should serve you well.

Regardless of your chosen method, your budget should set you free to enjoy life, giving you peace of mind that you’ve taken the right steps for both your present and future self.

Income

To get started, let’s look at your income. It may be easier to use your after-tax income for budgeting purposes, but if you choose to use your gross income, just remember to add taxes to your budget’s expenses. So, what should you include as income?

Obviously, your salary and wages from work should be included. However, a blended family may receive child support or alimony. You will need to decide whether to include this money in your family’s general budget or keep it separate. Ultimately, this comes down to your family’s unified vision and the money management system you and your spouse have decided to use.

If you have income from bonuses or commissions, the most conservative way to handle it is to exclude it from your budget and decide how to allocate the funds if and when it is received. To ensure you keep your lifestyle in balance, save about 75% of this income and put the rest into your current spending. 

Simplify Your Budget by “Bucketing” Your Expenses

Tracking expenses is where most people start to need help with budgeting. It can feel overwhelming to think about every single line item. While it is important to understand how you spend your money, you might find it helpful to think of your spending in separate “buckets.”

The three-bucket system categorizes income into three distinct areas: 

1. Essentials and “Must Pay” Expenses
2. Investing and Future Goals
3. Spending on the Here and Now

This approach helps you easily allocate and track your finances by providing a clear and straightforward structure.

Bucket 1: Essentials and “Must Pay” Expenses

The first bucket is for your essential needs and your “must pay” expenses and includes: 

1. Tithe – If you tithe, then you know this comes first
2. Housing needs – Rent/mortgage, utilities to operate the home, and property taxes
3. Food – Only include groceries, as dining out is not an essential need
4. Transportation – Car expenses or costs to use public transportation
5. Health insurance

Paying these items first in your budget will cover your basic needs for your day-to-day. This serves as an important foundation to protect your family from life’s ups and downs.

In addition to these five items, you should add your “must pay” expenses. Must-pays are obligations you’ve already created. For example, it could be a loan payment or the child support/alimony you’re required to pay. This is also where you would include taxes if you are using your gross income.

Once you have your essentials bucket figured out, you subtract this amount from your income. Now, you are free to start planning for your future needs.

Bucket 2: Saving, Investing, and Future Goals

The second bucket is used for taking care of your future self so that you’re in a position to enjoy life in the future. You should fill this bucket before moving on to the discretionary/lifestyle bucket. This bucket can include:

1. Cash Reserve/Emergency Fund – Building a cash reserve is critical to your long-term success. It’s there for handling large unexpected expenses and helps you minimize taking on new debt.
2. Retirement Savings – 401(k), 403(b), IRAs, etc.
3. Paying Down Debt
4. Non-Retirement Savings (Investment Accounts, 529 Plans, etc.) – Used for goals and events prior to retirement, such as college, travel, wedding, new car/home, etc.

Once you have an idea of how much you can/should commit to these goals, consider setting them up on autopay. This will help you avoid the temptation to hold some back for discretionary spending and free your time to enjoy other things.

Bucket 3: Spending on the Here and Now

This bucket is dedicated solely to your lifestyle—everything above and beyond what you need and plan for in the future. This bucket frequently leads to overspending as it is for things that are generally fleeting in nature. But if you set up the first two buckets on autopay and review them periodically, you can spend here knowing that your current and future needs are covered. Some examples of things you might include in this bucket are:

1. Dining and Entertainment
2. Activities, Sports, and Hobbies
3. Travel
4. Memberships and Subscriptions – Gym, streaming services, cleaning services, etc.
5. New Cell Phone for the Kids

How Much Do I Put in Each Bucket?

I’m not a fan of “rules of thumb” because they tend to be too general. Proper financial planning, which balances the needs of today and the future by aligning with your goals and vision, is the best way to figure out your budget. However, your “needs” bucket typically covers 50-60% (60% if you’re tithing) of spending. This leaves about 20% each to saving for the future and discretionary spending. An important thing to note is that the more you spend now, the more you need to save for retirement. It is rare to see people significantly reduce their lifestyle in retirement (many think they will, but few actually do it).

Tracking Your Budget

Monitoring your real-world spending against your budget and making periodic adjustments is important for staying on track as you merge finances into one household. 

You can use web or app-based budgeting software that automatically pulls transactions from connected accounts to categorize expenses. Alternatively, you can use a spreadsheet to track expenses. Log income deposits as credits and spending outflows as debits, summarizing by category monthly. Compare category totals to your budget to spot where adjustments may be beneficial.

If you’re a client, we provide secure access to integrated expense tracking in your Planning Portal. Simply connect accounts, and transactions will flow in automatically, eliminating tedious manual entry. 

Regardless of your tracking method, review the numbers monthly with your spouse. Celebrate small wins like sticking to dining budgets. Discuss any needed reallocation between categories if certain costs trend too high. Use insights to fine-tune your shared financial blueprint.

While blending finances presents initial hurdles, navigating your budget with empathy, wisdom, and clarity can strengthen your relationship. Visibility into how closely actual spending matches intended budgets provides accountability and confidence for newly merged families. 

As a life-centered planner, I love helping clients free themselves up to enjoy life in the here and now. If your blended family needs help prioritizing its budget, schedule an appointment here.

Based in St. Paul, MN, Endurance Financial Group is an Independent Registered Investment Advisor partnering with blended families to combine their household finances in a unified financial plan that works for all members of the family. They can be reached by phone at 651-605-2318 or online at efg-planning.com.