I can't agree more wholeheartedly with all the other ladies' advice here. I just have to echo it! I see this question come up on dgrin all the time (hundreds, if not thousands, of professionals post to that forum) and the answer is always a resounding "don't do it!"
Besides you not feeling confident, she sounds like a handful, and amen! and amen! to the fact that she will only get more difficult, not less difficult, as time goes on. And I think family members shouldn't be the ones involved in the official photography. You need to be there to enjoy it with your family, and you've got little ones---that would be unimaginably stressful. Add to that her demands, she's got expectations like a client who has $3000 to spend. And if her expectations are that high, she needs to hire someone who can put up with that for her. I would not, would not put that on your shoulders! It's not just the bridezilla issue, I wouldn't do a wedding no way no how for anyone, friend or family, I just wouldn't. Wedding photography is such a strange bird, and you either nail it for the client, or you don't. I've read stories where photogs posted gorgeous pictures and said I can't believe it, the client hated these, refused to pay . . . it's such a personal thing, I think someone who is impersonal to the client should be the one taking the pictures. It's an objective distance that won't be influenced by (or potentially damage) family relationships or friendships.
I was at the wedding of my husband's cousin a few springs ago. I had my old point and shoot, and was just getting interested in photography. The lady they hired came with an old film Rebel (nothing wrong with that, I just knew she wasn't a wedding photographer like she had advertised herself) and nothing else. No off-camera flash, diffuser, reflector, assistant. She was "free," just the cost of the film developing. I shadowed her discreetly during the ceremony, then broke off on my own and wandered around and took pictures. I had about 250 decent shots, a handful of great shots. (By the way, she didn't take ANY of the ceremony. Not a single one.)
The mother of the bride had them developed, and was shocked to find they were, every one, out of focus, people were cut off, they were crooked---she came home the day after the wedding in tears, crying that she had not a single good picture of Brit's wedding to give to her when she got home. I mentioned I might have had a few, and as soon as I got home, I processed what I could and sent them a disk. They were shocked, relieved, and so grateful. But the moral of the story is, they got what they paid for---crappy photography from someone who didn't know what they were doing (the professional), and crappy photography from someone who didn't know what they were doing, but at least knew she wasn't a wedding photographer (me).
Clients who are concerned about cost but still very demanding with expectations need to be avoided.
If someone can really only afford a cheeseburger, that's fine, cheeseburgers are gooey and good, but their expectations need to be to that they're going to be eating a cheeseburger, not filet.
Good luck!