Are you saving up for a new property? Have you been wanting a new car? Learning how to budget your family finances can guarantee you enough savings to secure your present and future needs. Keep reading to discover your way through financial freedom!
Fast Facts: What is a Budget?
A budget accounts for the income and expenses within a specific time period. A surplus budget has more than enough money allocated for its expenses. A balanced budget has its income equal to its expenses. A deficit budget has more expenses than its allocated income which calls for an additional stream of income.
Having a budget allows you to have a financial plan on how to stay on track of achieving your financial goals. Keep in mind that there are various mistakes you must avoid to better manage your family’s finances.
Mistake #1: No emergency funds
Where do you turn to in times of desperate need? Do you have a safety net to catch you when life unexpectedly trips you over? An emergency fund serves as your security when unforeseen challenges occur. It’s how you come out of a battle unscathed.
An emergency fund is like an insurance policy. You set aside a percentage of your monthly income for future use. Banks and financial experts recommend emergency funds to have three to six months’ worth of your salary. This can give you enough leeway to find another job when you unexpectedly lose your current job. An emergency fund can also make sure you don’t scramble for your life savings when your family gets sick.
The COVID-19 pandemic taught many families about the importance of an emergency fund. Living expenses do not stop just because there is a deadly virus. Learn more about how to calculate your emergency fund here.
You can also explore insurance policies to level up the way you manage your finances. Your health, life, house, and even automobile will no longer cause you significant financial troubles.
Mistake #2: No earning and spending tracker
Your knowledge of how much you earn and spend holds great financial power. It determines how you can buy a new car without having to borrow money. Knowing how much you earn and spend also disciplines you in making financial decisions.
Account for your family’s total earnings with your partner. Include all the streams of income like salaries, business income, and passive income. Remember that both you and your partner must be transparent and accountable for the numbers you both indicate.
It is imperative that you also track your spending. Your home budgeting is only as good as your expense allocation. What are the things you and your family spend money on? Are these things necessary? You can better appreciate earning and spending trackers by checking what percentage of your income goes to savings and investments.
Mistake #3: No Financial Discussion in the House
Do you and your partner discuss what you both want to achieve financially in the future? Communication is one of the most important things you should do when budgeting. It must be clear to you and your partner why you have to follow a budget.
Sit down with your partner and enumerate your financial goals to each other. Having a solid objective makes execution easier. Now break down your objectives into specific action points. What can be done to minimize household expenses? What can be done to keep saving 20% of the family’s total income monthly? What can be done to add another income stream?
Having the same financial goals as your partner can double your family’s pace towards financial freedom. Discussions about important financial topics can save you from many financial troubles in the future. Remember, knowledge is power.
Mistake #4: Not Categorizing Expenses
Categorizing expenses means organizing expenses into groups you can easily identify. The three categories include fixed expenses, variable expenses, and periodic expenses.
Fixed expenses consist of mortgage, rent, insurance premiums, and other costs that will stay approximately the same over time. These costs rank high in your budget priority list. Variable costs change from time to time depending on how much a situation calls for. Examples are groceries, utility bills, entertainment expenses, and clothing. Periodic expenses occur occasionally like birthday expenses and holiday trips. These expenses can also come unexpectedly and so an emergency hand can come in handy.
Categorizing your expenses can help you set your financial priorities depending on urgency. It gives you a rough estimate of how much to budget each month. You can also easily identify which category of expenses is flexible. When you run tight on budget, you can always adjust your variable expenses.
Mistake #5: Having high expectations
Be patient with your financial progress once you start implementing a budget strategy. Do not set high expectations. Your progress may not always be linear. In some months, you will have to deal with bigger expenses. In some months, you will spend less. But that’s life! These ever-changing situations should not stop you from having fun!
Starting to budget your finances is a big step forward to financial success. However, it is just the beginning of a long and committed process of achieving your goals. Do not be discouraged when you do not get the results you want. You can try again next month or the month after that. The more challenges you overcome, the better you get in winning over financial adversities.
More importantly, do not compare yourself to others. Healthy competition might motivate you but your real competitor is yourself. Achieve your financial goals at your own pace!
Key to Budgeting: Spend less than you earn
The goal of budgeting is to discipline you in managing your finances. It is just one of the many techniques that train you to make better decisions. The bottom line is to spend less than you earn. You budget because you want to live the present while being prepared for the future.
Sources:
Managing money and budgeting. (2020, October 21). Retrieved September 15, 2021, from Raising Children Network website: https://raisingchildren.net.au/grown-ups/family-life/managing-money/managing-money
Napoletano, E., & Foreman, D. (2021, June 28). Tips To Avoid These Common Budgeting Mistakes. Forbes. Retrieved from https://www.forbes.com/advisor/personal-finance/tips-to-avoid-common-budget-mistakes/