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Posted August 2001

Guide to Creating a Basic Family Budget

The purpose of this guide: This is a step-by-step guide for creating basic family budgets using the data sources and methodology as recommended in EPI's book, How Much is Enough? Basic Family Budgets for Working Families (2000). Before beginning, we strongly recommend that you refer to that book's section "Items for Inclusion" (p. 20-46) for an explanation of the methodology and data sources, as these details are not provided in this guide.

What you need to get started: To create a basic family budget using these instructions, you will need a spreadsheet (such as Excel) and Internet access.

What items are included: The following items are included in the basic family budget, and should be column headings in your spreadsheet:

• Housing
• Food
• Child care
• Transportation
• Health care
• Other necessities
• Taxes

Adjusting for inflation: When creating a basic family budget, you need to make sure all of your data are for the same year. Not all of the necessary data will be available for the year you choose, however. Thus, you need to use the consumer price index (CPI) to inflate all of the dollar amounts into the same year. The Bureau of Labor Statistics' CPI home page (http://stats.bls.gov/cpihome.htm) provides the consumer price index, as well as an explanation on how to adjust for inflation and an automatic inflation calculator.

Family types: These instructions are for two-parent and single-parent families. When you create your budget, be sure to specify the number of adults in the family, the ages and number of children, and obtain the appropriate data for the family type.

Annual or monthly amounts: Be sure to keep all figures in either annual or monthly amounts (whichever you prefer). For this example, we use annual data.

Geographic area: You will need to obtain the data appropriate for either your metropolitan statistical area (MSA) or county. An MSA includes the city and surrounding suburbs.

The budget items

1 -- Housing

The housing portion of the family budget relies on data from the Department of Housing and Urban Development's (HUD) Fair Market Rent (FMR) survey.

a) To obtain FMR data for your selected MSA or county, go to HUD's web site at http://www.huduser.org/datasets/fmr.html.

b) Select the nost recent FMR (probably year 2000). If you are not constructing budgets for the current year, you will have to deflate this number to adjust for inflation (see note above).

c) Find your MSA and retrieve the Fair Market Rent survey. Families with one or two children should have two bedroom units; families with more children will need additional bedrooms (two children per bedroom).

d) Enter the data in the housing column of your spreadsheet.

e) In a separate column, convert the monthly FMR to annual housing costs.

Example using Baltimore, Md.:
For a one-adult, two-child family in Baltimore, Md. in 1999, annual housing costs are $7,536 (for a two-bedroom apartment).

2 -- Food

The food portion of the family budget relies on the U.S. Department of Agriculture's (USDA) Low-Cost Food Plan.

a) To obtain food costs for your family budget, go to the USDA's web site at http://www.usda.gov/cnpp/using3.htm. This link accesses the "Official USDA Food Plans: Cost of Food at Home at Four Levels."

b) Select the link for the appropriate year.

c) Under the "Monthly Cost - Low-cost Plan" column, find the appropriate cost for each family member. Add the costs together for the total for your family type.

d) Place this total in your spreadsheet.

e) Convert the monthly figure to an annual figure.

Example using Baltimore, Md.:
For one adult with two children (a preschooler and a school-aged child), annual food costs in 1999 are:

$138 (female aged 20-50) + $91 (child aged 3-5) + $121 (child aged 6-8) = $350 per month * 12 = $4,200

3 -- Child care

The child care portion of the family budget relies on data from the Children's Defense Fund's (CDF) report, The High Cost of Child Care Puts Quality Child Care Out of Reach for Many Families. Most of the figures in this report are statewide averages, although data for some cities are included. (Unfortunately, there is no data provided for a few states.)

You can also find out whether your state collects data on the county level. To see if your state has county data, contact your state government and ask them for data from their market survey of child care costs.

a) To download the CDF report, go to: http://www.childrensdefense.org/release001211.htm

b) The appendix to this report contains the data you need.

c) For each child, locate the statewide average (or city average if available) for the child's age. You will have to decide whether you want to use the costs for a "Child Care Center," a "Family Child Care Home," or an average of the two types.

d) Enter this annual cost into the family budget spreadsheet.

e) Adjust the figures for inflation to make them consistent with the other data.

Example using Baltimore, Md.:
In 1999, for a family in Maryland with one preschooler and one school-age child in center-based child care, annual child care costs would be:

$5,272 (preschooler) + $4,253 (school age) = $9,525

4 -- Transportation

The transportation portion of the family budget relies on data from the Nationwide Personal Transportation Survey and the IRS cost-per-mile rate.

a) Find the population of your MSA from the Census Bureau web site: http://www.census.gov/population/www/estimates/metropop.html (if you are in a rural county, you can skip this step).

b) Select the average annual miles driven for your MSA size using the following table (if you are in a rural county, use the "Non-MSA" column). The table below was created using the methodology described in How Much is Enough?

Average annual miles driven by MSA population size

	MSA population size
	Less than 250,000	250,000 - 499,000	500,000 - 999,999	1,000,000 - 2,999,999	More than 3,000,000	Non-MSA
Average annual miles driven	8,437	7,927	8,612	9,121	8,402	10,541
Source: EPI analysis of National Transportation Survey (http://www-cta.ornl.gov/npts/1990/fat/index.html) data.

 

 

 

 

 

 

c) To find the IRS cost-per-mile rate for the current year, go to the IRS web site (http://www.irs.ustreas.gov/), then go to this sub-page: http://www.irs.gov/forms_pubs/pubs/p4630401.htm.

d) Use the following formula to calculate annual transportation costs for the family in your MSA (this formula only includes trips to work, school, shopping, church, or to visit family members):

One parent: [.69 (non-social trips 1st adult) * Average miles driven * IRS cost/mile]

Two parents: [.69 (nonsocial trips 1st adult) * Average miles driven * IRS cost/mile] + [.28 (work trips 2nd adult) * Average miles driven * IRS cost/mile]

Example using Baltimore, Md.:
Baltimore has a population of 2,483,952. Therefore, the annual miles driven is 9,121. Transportation costs for a one-parent family in 1999 are:

.69 (percentage of nonsocial trips) * 9,121 (annual miles driven) * $0.325 (IRS cost-per-mile rate for 1999) = $2,045

5) Health care

The health care portion of the family budget relies on data collected from an online insurance quote provider (www.ehealthinsurance.com) and from the Medical Expenditure Panel Survey (MEPS).

a) To obtain the non-group premium (NGP) information, go to http://ehealthinsurance.com.

Once at that site, choose the Individuals and Families link. Enter the relevant zip code.

Follow the prompts and fill out the online form according to the relevant family type. Fill out one form for each family type. You will receive a list of quotes for various health insurance policies available in the relevant area. Choose the cheapest. If you are doing budgets for more than one area or family size, be sure to choose insurance plans with comparable co-pays and deductibles.

If data is unavailable for your state from this web site, an alternative site is www.quotesmith.com.

b) Enter the information obtained from the site on the spreadsheet.

c) Obtain the information on the employee's share of the employer-sponsored health insurance premium (ESP) from: http://www.meps.ahcpr.gov/mepsdata/ic/1997/Index297.htm. Choose Table II.D.2

Locate the appropriate state, and then enter the figure on your spreadsheet. Adjust these figures for inflation. Out of pocket expenses (OOP) for 1998 were $93.76 per month. Adjust this figure for inflation..

d) Use the following formulas. Because some people get health insurance through their employer and others must purchase their own insurance, we use a weighted average based on the share of the population that has employer-sponsored health insurance and the share that must purchase private, non-group insurance (families with publicly provided insurance make up the remainder, and their costs are $0):

Monthly health care costs for single-parent families = [0.605(ESP) + 0.317(NGP) + (OOP)]

Monthly health care costs for two-parent families = [0.585(ESP) + .339(NGP) + (OOP)]

e) Enter these amounts on your spreadsheet.

f) Convert the monthly costs into annual costs.

Example using Baltimore, Md.:
For a one-parent, two-child family in Baltimore in 1999, non-group health insurance premium rates are $2,028 a year, and employer-sponsored premiums are $1,406 a year. Thus, health care costs are:

(0.605 * $1,406) + (.317 * $2,028) + $1,150 = 2,643

6 -- Other necessities

The other necessities portion of the family budget relies on data from the Consumer Expenditure Survey on the share of a family's budget they spend on items such as telephone, apparel, personal items, and other necessities. Annual costs for other necessities equals 31% of both annual housing costs and annual food costs combined.

Example using Baltimore, Md.:
For a one-parent, two-child family in Baltimore in 1999, housing costs are $7,536 a year and food costs are $4,200 a year. Thus, other necessities costs are:

($7,536 + $4,200) * 0.31 = 3,638

7 -- After-tax annual total

Add all of the annual amounts: Housing + Food + Child care + Transportation + Health care + Other Necessities = After-tax annual total

Example using Baltimore, Md.:
The after-tax annual total for a one-parent, two-child family in 1999 in Baltimore is $29,587.

8 -- Taxes

a) Payroll taxes = 7.65% of after-tax annual total.

b) To calculate income taxes:

Subtract the payroll taxes from the after-tax annual total to get the gross income needed to determine income taxes.

Use the income tax forms from the federal government and your state government to determine the family's income tax burden (or refund from the EITC). Most state tax forms are available online from your state government.

c) Property taxes are already included in the cost of rent, and sales taxes are already included in the other necessities costs.

Example using Baltimore, Md.:
Payroll taxes for a one-parent, two-child family in 1999 in Baltimore are:

$29,587 *.0765 = $2,263

State and federal income taxes for this family are $2,971

9 -- Pre-tax annual total

Add taxes to after-tax annual total.

Example using Baltimore, Md.:
The pre-tax annual total for a one-parent, two-child family in 1999 in Baltimore is $34,822.

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