Six rules for a smarter budget
Did you know you can manage your family’s accounts the way a company does? This means maintaining financial discipline, but without keeping things so tight that you have trouble absorbing surprise costs. It’s all a question of balance. In this article, myLIFE reveals six magic rules for a smarter budget.
To design and stick to a successful family budget, you don’t just have to avoid common pitfalls. You also need to apply a few good rules of thumb. In addition to the classic steps for an effective family budget, there are certain fundamental principles that can help you keep your yearly household accounts under control.
1) You have more than you think
Sadly, there’s no magic spell for getting rich quick! But how can you increase your financial comfort if you can’t increase your income? As it turns out, you don’t necessarily need to have more money to feel less constrained by your budget. However, you do have to pay close attention to your spending habits and the way you manage your cash reserves.
For example, planning for your recurring expenses and paying your bills as soon as possible will have a positive impact on your ability to stick to your budget. Even if it’s only an illusion, people who pay their bills at the end of the month feel wealthier than those who pay them at the beginning – and that can make them spend more. We recommend that you pay your bills when they arrive to keep a more accurate overview of your funds.
More generally, you should identify your bad spending habits, like the three coffees you buy out each day (which will give you just as many ulcers as your bank balance at the end of the month). Changing certain behaviours or finding costs to cut that are pointless, or even bad for you, can make a big difference. Sometimes, a number of small improvements can add up to a big difference in the end. To help you, myLIFE has even compiled a list of ways to save money every day. Give it a try!
2) Use the right budget categories and see the big picture
Do you have a holiday allowance that is separate from your restaurant allowance? That’s all well and good, but what if you were to treat yourself to a pricier meal than usual? Are you aware of how this would affect your ability to book your dream holiday, especially if it happened more than once?
Rather than giving yourself too many budget categories to keep track of every month, create overarching annual accounts to keep a global view of your finances.
Rather than giving yourself too many budget categories to keep track of every month, create overarching annual accounts to keep a global view of your finances. For example, make just one category for leisure (covering both restaurant spending and the holidays you plan to take in half a year), one for anomalies (your tax refund, surprise repairs, etc.) and one to save for larger planned purchases.
3) Make a separate account for big purchases
In fact, the best way to go is to open a separate account just for major purchases and set up a standing order to automatically deposit money from your current account. Over time, this account could do more than just fund home renovations or cover surprise costs. If you also stock it with things like tax refunds and work bonuses, there might even be enough for a luxurious holiday for the whole family, or a down payment on a new home!
4) Keep written accounts
Don’t rely on an estimated mental budget. Write things down! If you prefer to use software, take advantage of your bank’s mobile budgeting app, which is sure to offer an allocation feature to categorise your spending, as well as alerts to warn you when you’ve exceeded certain limits.
Just as paying in cash makes you more aware of your spending than intangible electronic payment methods, writing down your transactions gives your brain a chance to synthesise and understand them as part of a whole.
5) Communication is key!
Spending plans and budget priorities can vary between family members or partners, but it stands to reason that each person’s choices will impact the financial health of the whole group. To make sure whims of one member don’t cause unpleasant surprises for the rest, you have to exchange openly and know how to analyse your budget plan. It would be too bad if a simple failure to communicate meant that none of you could go on the holiday you’d been looking forward to for months!
Clear and regular communication allows you to plan well, and most importantly, to avoid blowing your budget.
In today’s society, money woes are often taboo, even in some couples. But there’s no doubt that clear and regular communication allows you to plan well, and most importantly, to avoid blowing your budget. And never forget that the need for good communication with your partner goes far beyond the realm of finance!
Studies have shown that couples who keep a joint account tend to make better use of their household income to cover basic family needs. Both partners are likely to spend less on treats for themselves which, though certainly a source of pleasure, can deplete the overall wealth of the home.
When times are lean, you have to pull together! And what is love without sharing?
6) Prioritise and stay flexible
A good budget is only good if it helps to maintain a realistic overview of all the income, expenses and resources a person or family has. Be sure to see it for what it is: a way of framing information. While your budget should map out a degree of financial discipline, it should also allow you to stay flexible.
You will have to review it regularly to ensure that it is truly realistic. As you gain experience over time, use the lessons learned to assess your home’s future financial needs. This also means you will have to reprioritise your family’s wants and needs as often as required.
Of course, you can always turn to a financial adviser for help with the planning, review and adjustment process. Just remember that you are the one who’s best equipped to determine your needs and those of your family.
When planning your budget, take a note from Richard H. Thaler, winner of the Nobel Prize in Economic Science: households should build sufficient flexibility into their budgets, and should review them regularly enough to allocate funds in an optimal way for serving the family’s interests.