Household budgeting: you need more than just discipline

Successful household budgeting is down to multiple factors.

The disposable per-capita income of households in Luxembourg amounted to EUR 33,332 in 2018, according to Eurostat (based on latest EU figures). This is considerably higher than the EUR average of EUR 22,689; yet the same principle applies regardless of income level: budgeting requires a certain amount of discipline. However, that doesn’t mean setting excessively rigid rules for yourself to ensure you’ve got enough leeway to cope with unforeseen spending – at the end of the day, it’s all a question of balance.

Keeping your family finances in check and avoiding pitfalls can be a tricky business, so it’s crucial to have an effective budget in place. As well as the usual tried-and-tested ways of keeping tabs on your budget for the year, there are various approaches you can take in order to keep more of your own money.

Be realistic

We’d all love to have a bit more breathing space when it comes to our finances. But how do we do that without actually earning more money? Taking a closer look at your spending habits more closely and better managing your outgoings can help. As can planning ahead for regular expenses and paying bills as quickly as possible. This will give you a more realistic overview of your finances.

Rather than lots of small, monthly sub-categories, it makes sense to set large annual budgets – this will enable you to maintain a solid overview of your financial situation at all times.

It’s also advisable to set up a standing order from your current account to a separate account earmarked specifically for bigger-ticket items. Then if any unexpected bills arrive or the time comes for some renovation work on your home, you’ll have the money ready in the account. And transferring any tax rebates or other bonuses to this account will mean you can afford that dream family holiday, or will even have enough for a good deposit on a new home.

Put it all down in writing! Always follow this guiding principle when it comes to financial matters.

Keeping track makes sense

Put it all down in writing! Always follow this guiding principle when it comes to financial matters. If you prefer to do it online, there are plenty of options available, including bank mobile apps. These normally have a function enabling you to categorise your spending, and, if the worst comes to the worst, they warn you before you exceed your limit. An increasing number of financial institutions are providing customers with this type of budgeting solution. Most apps allow you to perform day-to-day banking transactions online (check account balances, transfers, issuing a RIB, adjust limits, etc.), with some also offering tools to help you monitor and manage your finances on a day-to-day basis.

For your household budget to be effective, of course, you’ll need to make sure you have a realistic overview of every household member’s income, outgoings and savings. Always keep in mind the advice of Nobel economics prize-winner Richard H. Thaler: households should build sufficient flexibility into their budgets and allocate their spending in a way that best serves their interests.

Follow our seven-step guide to manage your finances effectively

Regardless of whether you live alone or with your family, are on a tight budget or have a comfortable income: if you want to maximise your assets either through saving or investing, you need to keep track of your finances. Follow our seven-step guide to success here.

Step 1: Identify the sources of your income. Before you consider your spending, it makes sense to first list all your income streams: salary, rental income, dividends, pension, social security, unemployment benefits, etc.

Step 2: List your monthly expenses. Make sure you include all your spending – even loose change for the coffee machine, or a treat from the bakery! The cost of items that only need to be paid on an occasional basis over the course of the year, such as premiums for particular types of insurance, also need to be listed.

Step 3: Categorise your outgoings. List your spending in clearly defined categories: housing, food, travel, insurance, family, healthcare, tax, leisure, gifts, etc. Experience shows that the biggest items in the average household budget are accommodation (30%), consumer goods (i.e. food) (20%) and travel costs (15%).

To ensure a clear picture, it’s important to distinguish between fixed and variable costs when drawing up your budget.

Step 4: Identify your fixed and variable expenses. To ensure you have a clear picture, it’s important to distinguish between fixed expenses (rent and charges, mortgage repayments, telephone/internet, home insurance, etc.) and variable expenses (shopping, leisure, fuel, medical expenses, holidays, etc.). This will enable you to determine unavoidable costs and identify any potential for savings. On that note, you should also try to define a set amount to put aside every month for saving purposes.

Define your goals

Step 5: Define your goals. Once you’ve got an overview of your finances, you can now analyse your consumption habits and make any necessary changes. Generally speaking, this step can throw up surprises in terms of where you can cut back a little and save money.

Step 6: Draw up a budget for the year. Knowing how much money you’re spending every month makes it easier to plan and make any adjustments. By including items such as holiday costs, the cost of new tyres for your car, as well as a birthday gifts budget for friends and family, you’ll make things simpler. A specific category for unplanned expenditure (cost of medical treatment, car repairs, etc.) can be another good move in terms of avoiding nasty surprises.

Step 7: Stick to your budget. This step is undoubtedly the hardest to master. But if you keep a constant eye on your finances and stick to your budget, you’ll be able to stay on track.

Different priorities

Family members and couples can have different wants and financial priorities; however, each individual’s choices impact on the assets of the whole family. This factor also need to be taken into account when drawing up your budget. To ensure these wants don’t have an unexpectedly negative impact on the needs or aspirations of other members of the household, it’s important to communicate and be open about your finances. Regular communication can help reveal, and most importantly prevent, excess spending.

Studies have shown that, in general, couples with a joint account tend to use the money in there for important family spending. And couples generally buy fewer luxury items since they can impact the household’s overall budget – even though they would unquestionably be a nice thing for the individual to have. Generally speaking, both partners need to play their part if finances are tight.

Obviously it’s also possible to manage your household finances through separate accounts. In this case, each individual takes responsibility for specific items of expenditure. Each person decides for themselves – regardless of whether the budget is evenly distributed. Setting up a joint account is probably the simpler method, however. This doesn’t stop anyone from keeping their own personal account; in addition, it enables couples to save jointly and plan joint investments on a transparent basis.

Living together under the same roof inevitably involves joint living costs.

What do couples do? Each to their own

Since living together under the same roof inevitably involves joint living costs, couples need to be organised when it comes to rent, shopping, insurance, joint travel, school costs and the like. What’s the best way to do this, while at the same time retaining a personal bank account? Here we look at the approach taken by two fictitious couples.

Barbara and William decided to keep their personal bank accounts without opening an additional joint account. Each manages their own personal spending independently. As far as they are concerned, this is the best way to avoid squabbling over financial matters. If one of them wants to buy something for themselves there’s nothing to stop them – but only if they can still pay for the joint spending they have agreed to as a couple.

For joint costs such as rent, electricity and water bills or food for their pet Labrador, Barbara and William have drawn up a list of recurring monthly costs. As they don’t have a joint account, William pays the rent directly out of his account while Barbara settles other costs in the same way. The shared costs are divided equally between the two of them. As they earn practically the same salary, it’s easier to calculate. In the case of unforeseen costs or leisure spending affecting the household as a whole, such as new brake pads for the car or a trip to the cinema, William usually picks up the bill. Barbara then pays her share by transferring the corresponding amount to William’s account.

The couple are planning to buy a house – and this is where their way of organising their finances starts to become tricky. Saving is a complicated business, given that they don’t have a joint account. The fact that each of them does their own thing doesn’t make it any easier.

We share nearly everything! That’s the way Jeremy and Marie do things: although they retain their own bank accounts, they’ve also opened a joint account to simplify the financial management of their household. For them, it’s quite simple: each of them finances their own hobbies – particularly as they don’t share them. Jeremy is a keen paraglider, while Marie doesn’t have a head for heights and enjoys oil painting. Both individuals pay for all their hobby spending from their own separate accounts.

The mortgage payments on the house as well as internet charges and shopping bills are paid for out of their joint account, with both paying in their share via online banking. As with Barbara and William, this monthly budget was set in advance. The costs involved are identifiable and recurring, making them all the easier to automate.

Since Jeremy earns 30% more than his partner, but wants to keep things fair, he not only pays a proportionately higher share of their joint spending but also unforeseen costs as well as the cost of leisure activities.