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You should sit down long beforehand with both parties involved and get some ground rules established. All the factors need to be discussed; from family size to geography to who is paying for the wedding - get it all out in the open. As in, "Look we're going to have 200 people, we're not going to give them dinner, it is going to be a cocktail party. 125 come from the bride's side, 75 come from the groom's side." If that's understood right at the beginning, and then the groom's family wants a few more, you've got a basis to work from.
Invite those closest to you within your budgeted amount of people. Some people get carried away and invite everyone they know to their wedding. I've found the most enjoyable weddings are the ones that have the people closest to them. One couple I know only invited guests they BOTH knew. It kept their parents from inviting strangers to their wedding and they were surrounded by everyone they loved on their special wedding day.