It’s easy to treat family money like a utility: Bring in as much as you can, take out what you need, and just hope you don’t run out. But you wouldn’t run a business that way, so why would you do the same for your family? It can seem daunting, but it’s really not that hard to turn your family finances into a successful long-term enterprise.
1. Define your financial goals
Make sure you’re aware of everything that makes up your financial situation: assets, debts, insurance coverage and investments. Use software programs or work with your financial professional, if you have one. Then think about what you want to do with your money broken out in one, five and ten-year increments is the first step to taking control. Whether you’re saving for your kids’ college funds or simply looking to upgrade your family’s vacation budget, write it down. Lists can help you prioritize goals and start to form a plan.
2. Create your own financial statement
Start by determining your net worth using assets and liabilities. Assets include bank accounts, stocks and property values. Liabilities include loans, leases, mortgages and credit card debt. Listing all of these will give you a clear view of what you owe and own.
Then, track all of the income that came into your household over the last year. Create an expense column that shows where all of that money went. Compare these past numbers to your current balance sheet to project future expenditures and identify where you may be able to better apply your income toward expenses that further your goals. For example, you might find that you shopped for clothes or electronics more than you realized last year—and in the coming year, you might plan to put a similar amount of money toward paying off your credit card debt.
3. Examine your current budget
Set up two or three hours of uninterrupted time with your paychecks, your bills and a calculator to see where you are today. You need to determine what percentage of your take home pay goes into these three categories:
- Fixed costs: mortgage, rent, insurance, utilities
- Financial goals: savings, paying off debts
- Flexible costs: food, travel and entertainment
A quick online search will reveal plenty of free online budget calculators that can make this task easier.
The “50-20-30” Rule. For a well-balanced budget,use the “50-20-30” rule of thumb: Spend no more than 50% of your take-home pay on fixed costs, at least 20% on financial goals, and no more than 30% on flexible costs. The lower you can get your fixed and flexible costs, the more you can put toward your financial goals.
4. Remove unnecessary expenses
While some fixed costs— most notably mortgage or rent—are set in stone, others aren’t. If any costs strike you as conspicuously high, it’s time to shop around. There may be better deals to be had on phone service, cable, Internet service, auto insurance and health insurance. When your life changes, so should your insurance protection. Review your auto and life insurance policies annually to see if they still meet your needs.
Take a hard look at eliminating some costs all together. For example, the rise of online news and television and movie streaming services has many people questioning whether or not they need once commonplace luxuries like cable TV. Take an equally critical look at flexible costs—calculating the amount you spend on eating out or entertainment will probably increase your urge to cook more at home. You’ll likely find there are plenty of small ways you can save that will add up in the long run.
Personal finance expert Mellody Hobson, president of Ariel Investments, offers these ways to save once you have your budget, goals and balances in alignment:
- Ensure bank account fees haven’t increased. You may need to maintain a minimum balance, use direct deposit or conduct your transactions online to avoid penalties
- Apply “extra” money you bring in to pay off credit card debt—or if you’re out of debt, toward an account reserved for emergencies
- Consider putting your tax refund into your 401(k) or IRA
- Plan your major purchases for the year to capture savings. For example, buy seasonal items such as patio furniture off-season. And buy jewelry long before or after Mother’s Day or Valentine’s Day
- Know the details of your health plan and avoid out-of-pocket expenses if at all possible
5. Pay off bad debt first
Concentrate on paying off “bad debts” like credit cards or personal loans before “good debts” like student loans, mortgages, or business loans. And prioritize each group by interest rates of your debts. Tackle the debts with higher rates first, paying off more than just the minimum balance every month. Even if the debts are large; in the long run, you’ll be saving by paying off less accumulated interest. If credit card debt is your particular demon, sit down and make a realistic credit card pay-off plan.
A student loan is a classic example of “good debt”; not only was it an investment in your future, the interest rates on the loan are often lower, and the interest is often tax-deductible. Making your monthly student loan payments in full and on time can help boost your credit score.
6. Save up for education
A 529 savings plan is a great way to prepare for ballooning college tuition rates. While the money you put into the 529 plan is subject to income tax, any earnings made through investment aren’t subject to federal tax (and, usually, not state tax) when you take them out to pay for tuition or other educational expenses.
There are two main types of 529 plans:
- Prepaid tuition plans – pay for all or part of a year’s tuition ahead of time, locking in today’s rates no matter what the school costs 10 or 20 years from now.
- Savings plans – which you to set up through a state or through educational institutions, allow you to contribute to an individual investment account much like a 401(k)
Start your research on college savings plans today.
7. Find a finance management app
Once you define a new budget, consider using an app or website to help you stick to spending limits that will make it work. There are many budgeting apps that will notify you if you’re nearing your monthly spending limit in a certain category, as well as remind you when bills are due and track the growth of your savings.
You Need a Budget helps users track spending and set short-term savings targets, such as putting a little away every month for a payment you know you’ll have to make in a few months.
8. Talk to a financial professional
Consider talking with a financial professional about your goals. Many agree that working with an experienced person to create a plan can only help you get where you want to go.
No matter what you decide to do first, make sure you decide to take action. The worst thing anyone can do while planning for the future is nothing at all. If you’re ready to start investing, contact a Nationwide financial advisor today to learn about investing options and set up a financial review.
Figuring out how to get your fixed and flexible costs under control goes hand in hand with tending and growing that 20-plus percent savings you’re putting toward financial goals. A little forethought could get you started on the path to financial security for the rest of your life.