Family Budget….
The more you earn, the
more you spend. That’s why even with an increase in earnings, many families
continue to live pay-day to pay-day. We call it the ‘month-end-blues’. Creating, implementing and monitoring a Family Budget is a
step-by-step process that will help you clear debts and have more available
cash to do the things that will provide a brighter financial future for you and
your family.
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| Oops! |
Money comes
in ^^^^^ Money gets spent!
Simply worrying when the end of the month approaches, will not help.
Worrying is stupid, it's like walking around with an umbrella waiting for it to
rain.
The purpose of family
budgeting is:
1. To have a clear picture of one’s financial
situation.
2. Cutting costs and gaining control.
3. Starting to save, building up wealth and
liquid assets over time.
4. To be prepared and avoid surprises.
5. To save for a major purchase
6. To get out of a vicious cycle of ever-spiralling
debt.
7. To eliminate money as a source of tension and
topic for argument in the family and become empowered to know that debt does
not rule their lives anymore!
Steps to work out a family budget for
everyday living:
1. The first step would be to accurately
estimate your annual family income. This could include salaries, bonuses,
commissions, rent income, family business profit or other sources of income.
Then set aside what you would want to save for long term goals like, child’s
education, retirement etc. The balance should then be treated as your available
income.
2.
You should then list out all your recurring household expenses along
with the scheduled dates for fixed pay-outs. The list should include bills that
must be paid on a month to month basis and are likely to include: groceries, your
home loan EMI, rent, electricity bill, phone bill, petrol, driver’s salary,
cable television bill etc. Add any other monthly expenses you have such as
child care, and credit card bills. Work out how much you need to put aside each
month for less frequent but necessary expenses such as doctor visits, car
maintenance and repair, toiletries etc. The list should be as exhaustive as
possible and should cover almost all day-to-day living expenses. “Beware of little expenses. A small leak will sink a great ship”. –
Benjamin Franklin
3. You should then write down your short,
medium, and long term goals. The goals should be realistic and achievable with
some financial discipline. You should also prioritize these goals.
4. You then need to prioritize how you
want to save money regularly. This would mean jotting down what savings
categories to budget for and how much to fund them and on what schedule.
5. You should then categorize the expenses
into broad heads like must have (grocery, electricity expenses, telephone
bills, petrol etc.), good to have (weekly eat-outs, movies etc.), want to have
(annual vacations, upgrading your car etc.). This will help you to plan out
your expenses and discover avenues to cut costs and save.
6.
Create an emergency
fund. This should not be confused with the contingency fund which should
typically be 6 months of your expenses. This emergency fund is just to take
care of any particular month where you over-shoot your budget. “Even though work stops, expenses run on”. - Cato
7. Work out your personal spending allowance.
This step is the most important as it takes a lot of discipline and can
undermine your whole budget plan if not followed.
8. Subtract your expenses from your
income. This is your surplus and the amount. Based on the amount you have
leftover, decide how you would like to allocate it. Items you might want to
include are: clothing, eating-out, vacations etc.
9. The last and most dynamic step is to
constantly review your budget against the actual expenses. Budgeting is an on-going
exercise. It is great to have a budget but it is more important to track what
you actually spend and make the necessary adjustments to help stay on course.
Some of the broad
categories of expenses could be:
1. Obligations – Rent, home loan EMI, insurance
(health, auto, home, and life), school fees, taxes, property taxes etc.
2. Necessities – Food, groceries,
utilities (gas, electricity, household supplies, car maintenance, monthly
parking, housekeeper, household repairs, internet service, laundry expenses,
cable TV etc.
3. Pocket expenses – Treat this as a whole
category, covering: lunch at work, snacks, coffee, drinks, newspapers, magazines,
cigarettes etc.
4. Family Allowances – another whole
category including items like : entertainment, weekend outing, movies,
concerts, home improvements, magazine and other subscriptions, dining out etc.
5. Personal allowances - clothing,
hobbies, personal recreation, books, CD’s, manicures, hair, personal gifts,
night out with friends, gardening, films, sports/recreation, family gifts etc.
Some
good practices…
1. Keep a record of all expenses.
2. Look at possible ways to curb expenses
before finally dipping into the emergency funds or skipping the savings habit.
3.
Avoid credit
cards except for emergencies. Maintain average quarterly minimum balances
stipulated in your savings accounts to avoid charges. Often we hear people say “My bank
is the worst. They're charging me money for not having enough money in my
account. Apparently, I can't even afford to be broke”. It would be better to close down multiple savings accounts
unless it comes with some convenience that is absolutely necessary.
4.
Study your spending habits regularly. Check your credit card statements,
savings account statements etc.
Some general
strategies to work out a budget are:
Shift your
attitude toward spending and actually focus on saving money, planning ahead and
driving for success.
Develop a
greater awareness of how you earn, manage, save and spend money.
Be aware
about how advertisers, retailers, and manufacturers would lure, entice and want
you to spend your money.
Do not envy
others and crave for things that they might have or even worse, get deeper into
debt to compete. It is counterproductive and can ruin lives!
Avoid
impulsive purchases – you might discover that the item is not worth buying or
you don’t actually need it.
Involve the
family in the budgeting process.
Set spending
limits and stick to them.
Do not make
ends meet using credit cards and stay away from cash advances.
Understand
your income – know where the money is coming from and how it varies throughout
a one-year cycle.
Understand
your expenses – monthly and irregular, unexpected expenses.
Know your
own habits, spending, temptation, and where the areas of risk and exposure are.
Have the
right number of credit cards
Set aside
pocket money for daily incidentals
Create a
family allowance to cover entertainment
Celebrate
when you have money left over at the end of the month.
Why budgets fail:
Negative Attitude - A
positive attitude about budgeting is essential to your success. If you think of
budgeting in negative terms (such as a financial handcuff, restrictive, a
sacrifice etc.) you are bound to fail. Think of a budget as way to achieve your
dreams and goals--and that postponing the instant gratification of spending all
the money you earn is worth the rewards you will get in the end.
Low Motivation – Is
budgeting an escape route from your nagging spouse? Then it isn’t going to work!
The best motivations are internally generated. You must honestly believe that
budgeting can help you meet your goals.
Unrealistic Expectations - What do you expect to gain from drawing up and following a budget? Do
you think that setting up a budget will magically transform your spending
habits instantly? No, never! Budgeting is a long drawn process. Those who stick
with it, through thick and thin will see steady, measurable progress towards
the goals that really matter. 
