Arguments about finances are a major problem and source of stress for couples, and a contributing factor to divorce.
Poor household financial management creates frustration, disappointment, and ultimately breaks up relationships and families.
Let’s look at six important factors every couple or family needs to ensure good household financial management.
1. Goal Setting
Setting what goals to achieve depends on your priorities. What are the things considered important? Each household will have different priorities.
• Short-term (1 to 2 years)
– A delayed honeymoon overseas trip to Europe.
– Clearing credit card debt
• Medium-term (2 to 5 years) time
– The dream house that fits your lifestyle.
– A second family car for transporting children.
• Long-term (10 years and above)
– Education fund
– Retirement fund
List your financial goals, print it, and display it. A visual can be motivating.
2. Understanding current finances
Incomes and expenses
Analyse your present finances. It will be simpler to decide where you want to go if you know where you are now and how far your goals are to achieve.
The earlier you and your partner have a mutual understanding of spending, the sooner you can end frustrating arguments about money.
Invite the whole family to participate. If you have children, include them. It’s a good time to educate them on money management.
Lay out in detail your individual incomes and expenses. Be truthful. Don’t worry about excesses. It’s not the time to pinpoint faults but to understand each other’s spending habits.
Segregate your expenses into “fixed and variable”, debts and assets. Be clear about the overall aspects of cash management.
For example, if there are any purchases exceeding a certain amount, it must be discussed first. Understand individual financial standings and future expectations.
Now, track actual household expenses for two to three months. You need to know where your hard-earned money goes. The results may spring some surprises.
At this point, don’t worry about the budget. Instead, the idea is to thoroughly capture the true situation at hand in order to properly provide for your shared future together.
3. Wants vs needs analysis
For a young household, the priorities are to live within your means and start saving to grow wealth. Make saving a monthly habit.
Set up your bank accounts to automatically transfer a certain percentage of your salary to a savings account monthly. Let the power of compounding work its wonder.
Cutting down on expenses means you will have more money to invest. To do this, you must differentiate between “wants” and “needs”.
“Wants” are products and services you’d love to have but are not necessary – a bigger fridge or new leather shoes.
“Needs” are products and services you require and are necessary – food, shelter, clothes.
After three months of tracking, you may find some expenses aren’t necessary.
Before you buy anything, ask yourself first whether not having it would harm you in any way. If unsure, wait another day before buying it.
4. Create your budget
A budget – even a simple one is the surest way of keeping you from spending more than you earn. Early adoption is key.
Take a look at the income and expenses you identified earlier. Your salary should be consistent every month. Your expenses are what you should scrutinise. Categorise it to “fixed” and “variable”.
• Variable expenses are your priority to adjust spending – groceries, eating out, hobbies, gas.
• Your “wants” and “needs” are different. Spend on your “needs” and reduce or cut on your “wants” so you have more money to cater to the “needs”.
The goal is to always spend less than you earn. Example, cut back on premium coffee if it costs you a few hundred dollars a month. Bring your own coffee from home.
• Review your largest household expenses. Find a better deal elsewhere.
Don’t include extra or occasional incomes from side jobs or freelance work. You should invest it instead. Strive to have a positive budget as fast as possible i.e. your income must exceed your expenses.
Start to grow your household wealth now. Start with fundamentals such as building your emergency savings fund.
5. Tracking Expenses
Track of expenses on a weekly or daily (preferable) basis.
The most important principle in spending is to only spend money you have. An exception is if there is an emergency.
You should not use future money (money you expect to earn in the near future). The budget will show that most of us spend money on petty and unnecessary things.
Uncontrolled usage of credit cards is the main reason for overspending. Use your credit card only if you follow these rules:
• Clear your balance every month.
• Use the card only for needs, not wants.
• Pay at least the minimum amount. Don’t skip a payment.
• Treat credit cards as a tool for budgeting and pay off the balance every month.
• Use a rewards card.
• Stay under 30% of your total credit limit. One way to keep your credit score healthy is to keep your credit usage ratio under 30%.
• Protect yourself from credit card fraud.
6. Periodic reviews
Your budget must be reviewed and re-evaluated. Situations may change, mistakes made, and needs vary. A new budget takes time to reveal whether it is on realistic statistics.
For the first year, review your plan monthly. In the second year, review it every quarter. But, for any fundamental changes in your life, re-look your plan and change it.
An example of a major change would be a loss of employment, or purchase of a house that requires cut backs in other areas.
Life is unpredictable. Adjust your budget if necessary. A life plan with a solid foundation will give you an advantage in reaching financial freedom.
This article first appeared in https://mypf.my
MyPF is on a mission to help simplify and grow Malaysians’ personal finances through financial education.