5 ideas to handle domestic accounting efficiently
The end of the month is here and you realize that you have less money than expected in your checking account but you do not know the reason of this imbalance. It sounds familiar, doesn’t it? We are always in a hurry, meeting commitments, and we do not stop to analyze the state of our finances, but the solution is at your fingertips: designing and maintaining a domestic accounting.
In order to examine the strength of your household economy you must answer three questions: Can I make ends meet without any problems? Would I be financially okay if I were to lose my job tomorrow? Do I have economic resources to afford an extraordinary expenditure in the event of an emergency?
As the Bank of Spain indicates in its program Finance for all, if the answer to any of these three questions is “no”, your household economy needs a preventive treatment. Living without anxiety and with permanent financial security is possible when applying a suitable planning and savings strategy. We will help you achieve it with the following five key elements:
1. Prepare a budget
To prepare a budget it is not necessary to be a Minister of Finance. You just have to spend a little time designing an income and expenditure structure and adapt it to the needs at any given time. Now that the summer is coming to an end it is the ideal time to do it. If you think ahead, you will not have to suffer hard January and you will be able to even prepare your finances for another vacation.
As in the case of a business or a Government, it all begins by knowing what are the disbursements that you need to make each month, and knowing how much money do you have to make them. If you are familiar with new technologies, you can use a computer or a mobile device to make your draft budget, you can also download a free application from your financial entity or, if you prefer it, you can use a pencil, paper and a calculator to create a template similar to this one:
On the left column you will write down your family’s monthly income including only the fixed income. On the second column you will write the expenses, differentiating the mandatory from the necessary and the occasional.
The mandatory expenses are the ones that you cannot stop paying and you cannot vary their amount, that is to say, those payments that you need to pay on time so that your financial stability won’t be at risk: the mortgage or rent, the community fees, or returning bank loans. As for the necessary expenses, those are the ones that you can reduce if necessary, but you cannot eliminate, that is to say, the utility bills, food, transport, vehicle insurances, health services, school costs.
You must be as honest as possible with yourself. If you like to go out often, or if you are an easy target to your children when you take them to the supermarket, you need to take these factors into account when you elaborate a cost estimate.
Do not forget to keep track of your bills and to write down in a calendar the payment due dates; review your bank accounts with periodicity to update the template of income and expenses if necessary.
2. Golden rule: income must cover expenses… and there must be some money left
The golden rule to good finances is that income should cover the mandatory and necessary expenses, having some money left over to face occasional expenditures and, in addition, saving money. Does it seem difficult? It is not so hard… and it has a reward: your financial cushion will increase in a very short time and you will be able to face the future with peace of mind.
"The key to everything is spending less than is earned"
3. How to create an emergency fund
To be able to buy a car, buy a house, make a trip, pay for your children’s schooling or face an unexpected cost you must have an emergency fund. To calculate the amount of money you can allocate to this safety net you must determine how much cash you might need urgently, so you can keep it in a bank account with immediate availability, keeping it separately from the bank account to pay the bills or credit card payments.
Do not invest it in fixed term deposits or guaranteed funds that charge a penalty if you withdraw the money before the maturity date. You can choose a risk-free banking product, without commissions and with maximum liquidity. Go to your bank and get information on the products that provide liquidity whilst remaining profitable, however small the profit, and reserve a small quantity in cash that does not entail an excessive risk in the event of theft.
4. Set specific and attainable goals
Every good household economy has specific and realistic goals. The main one must be to generate savings repeatedly, even if the amounts are not big if the income is modest. Another key element is to control expenditures and to avoid squandering, although some degree of indulgence is okay once in a while. It is not necessary to behave as Franciscan monks!
The third goal is to completely eliminate indebtedness, since an increase in interest rates will increase the cost to refinance any liability. Every month you must allocate a portion of your income to that end, as well as to prepare for retirement and to contract products to protect your family, especially if you have dependants.
5. The whole family should go in the same direction: what is yours, what is mine, and what is ours
When thinking about the challenges of a family life people often think about the issue of household chores, but seldom the issue of money management distribution is discussed. There is no reason why all the family members must think alike, but a basis of compatibility must exist which sets the direction of the household finances. Now that the summer is coming to an end is the ideal time to involve your children in the beginning of the school campaign, helping them to acquire healthy financial habits that will be very helpful for them in the future.
If you follow these recommendations you will see how your family financial security increases, investing in your peace of mind. Eventually, everything comes down to an issue that all the mothers around the world know very well and many Governments forget: the key to everything is spending less than is earned.