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Managing your household finances is not overly complicated. But it certainly is not intuitive either. Luckily, there are some basic concepts to managing money that are easy to understand and simple to implement. Successful home economics is the straightforward process of making your dollar go further and spending conscientiously. To master the art of managing your household finances, you need to start from the beginning.

Start With a Plan

Just as a shopping list makes a trip to the grocery store easier – and less expensive – managing your family’s household finances will be easier if you follow a plan. That plan should consider several components. They are:

  • Budgeting
  • Saving
  • Investing
  • Managing Credit
  • Protect Belongings
  • Optimizing Windfalls
  • Seeking Advice

The goal is to create a framework that helps you live within your means and provide the financial foundation upon which you build the structure to get you where you want to be years from now.

Create and Manage a Budget

Budgeting is simply the process of assigning expense categories. Some of those categories will be necessities, some will be luxuries. A budget helps you recognize and memorialize your wants and needs.

Wants are typically luxuries. They are the things you would like to have if there was money available in the budget. Needs are things you can’t live without. For example, everyone needs food and shelter.

But there is some overlap between wants and needs. Food and shelter are good examples. You can prepare low cost meals at home to preserve money for other parts of the budget. Or you can dine out at expensive restaurants every night and miss the savings opportunity.

The key takeaway about budgeting is that a dollar can only be spent once. Once it’s gone, it’s gone forever. So, budgeting is all about determining what is really important and then spending wisely.

For example, somebody whose after-tax salary is $2,400 each month might prepare a budget that looks like this:

Rent: $600

Insurance: $300

Food: $200

Gas: $100

Restaurants: $100

Student loan payment: $250

Household and miscellaneous items: $50

Haircuts and beauty: $50

Saving: $350

Retirement: $400

Because the budgeted items consume this person’s entire after-tax earnings, he or she is left with nothing to spend at the end of the month. This is called a zero-sum budget.

Zero based budgeting forces you to allocate every dollar earned. It’s helpful because unassigned dollars can be spent unconsciously. Uncategorized dollars create the misconception that they are excess and available for consumption. The value of a zero-sum budget is that it forces you to save.

For this method to be successful, it must be tracked, for example, on a spreadsheet. This is really the only way to know whether you are staying within your budget.

Recording and regularly reviewing your budget allows you to see where your money is going. It illustrates how your spending habits can impact your savings and tees up the question, “will spending this now improve my financial future”? The process helps you set priorities.

Develop Saving Habits

Saving for the future is the only way to finance it. Yet, the future unfolds continuously. There is always some consumption goal (a want or need) on the immediate horizon. As such, savings must be considered in the context of short- and long-term goals. The investments that fund these goals should also be short- and long-term.

Short-term goals should include an emergency fund to cover unexpected expenses. Long-term goals include retirement, which could be decades away. And there are any number of other goals in between these. For example, one might concurrently save to both buy a house and pay for a wedding.

The point is to set money aside for emergencies and consumption goals that come due over time. And savings should be used only for those specific goals.

Plan Investments

Investing is a process, not an event. One doesn’t merely make an investment and walk away. It should happen in the broader context of how life events unfold. So, planning is very important.

Your investments should be informed by a comprehensive financial plan. The key to investment success is matching consumption goals – both short-term and long-term – with specific investments that match the timing of those goals.

For example, cash must be preserved to cover short-term goals and emergencies. A savings account is perfectly acceptable for this. Longer-term goals can be financed with riskier assets that have greater long-term growth potential, such as a stock mutual fund or combination of funds. Matching the timing of consumption goals and investments is a fundamental component of financial planning.

Manage Credit Score

Another important factor in managing money is managing your credit score. Borrowed money must be paid back in a timely fashion. Paying late or carrying a large balance relative to a card’s credit limit can damage your score.

This is important because credit score affects your access to, and cost of, credit. People with a good score have access to very favorable terms and lower interest rates. The opposite is true for someone with a low credit score.

So, credit should be used judiciously. Those building wealth and saving for the future should consider the long-term cost of borrowing money to purchase consumables. All too often consumers find themselves still paying for things long after the enjoyment of them is gone.

Protect Belongings

A comprehensive financial plan will include a look at the assets you accumulate over time. You should seek to protect the things you have. An insurance review can determine if your belongings are properly protected against common hazards like, fire, flood, and theft.

Take Advantage of Windfalls

Every now and then fortune smiles on people in the form of an unexpected windfall. Whatever the source – inheritance, bonus, an unexpected tax refund – you should resist the temptation to spend such money.

Folding windfalls into your existing savings and investment plan can boost your future wealth. It can jumpstart – or dramatically advance – the likelihood of achieving your future consumption goals.

Seek Advice

Managing money can be intimidating for some. It ought not be. Our Member Service Representatives can help explain these concepts. And they are all here to help.

And use our Retirement Planner Calculator or Retirement Nestegg Calculator to help you start on the journey to a secure financial future.

Serving with purpose

We are proud to serve your investment needs. Our Member Service Representatives are available to provide portfolio planning, college savings services and general investment guidance. Please contact us. We’re here to help you find the right investment solutions for you, your family and your future.

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