How To Create And Maintain A Family Budget — Part 2
In part 1, we discussed about the importance of the budgeting process on your family’s financial wellbeing, and some of the immediate steps that you can take to improve it.
Refer to this article if you missed it previously:
https://www.moneyparentsg.com/post/how-to-create-and-maintain-a-family-budget-part-1
Today, we are back with more tips, and steps to help you and your family budget more efficiently!
#4 Pay Less
After identifying which expenses are potential unnecessary black holes, it is vital that we trim our expenses in that area.
For example, dining out can be a drain on many budgets. Menu planning can be valuable in this case, where we can reduce costs of food through bulk sales on groceries. While it can be effective, lifestyle costs such as these are variable, and we will need more conscientious effort to reduce them, and thus more likely to lapse as most of us find sticking to one thing challenging.
Fixed expenses are usually the go-to to trim, and it can be trimmed more effectively at that too. For example, mobile plans and subscription services like Netflix, has a regular monthly payment. Reducing the costs of these plans are usually more effective and lasting, as it doesn’t require constant monitoring and effort to reduce on your part. Just set up a GIRO for a new cheaper plan, and you are set, reinforcing discipline.
Another fixed expense that many people do not know can be reduced significantly, is insurance costs. Insurance can often be a fixed expense that many family over pay, and it can take up a sizable chunk of your family’s monthly cash flow. It is not to say that you cut your insurance, as insurance coverage is a very important aspect of your financial portfolio, but rather optimize it by cutting away unnecessary or repeated coverage, and getting the most cost effective plans for yourself. Hence, it is important to review your portfolios regularly, and make sure your plans are optimized according to your budget and needs.
#5 Building Savings
Savings should be the next priority after your expenses are settled. It is important to have a minimum of at least three to six months of expenses in cash in case when you need it.
After an emergency fund, retirement is the next priority. While retirement is something that is far away, it is important that we work towards it as soon as possible, as the later we start, the more cash outflow we will need to set aside to save up towards retirement in the future. Start early, and you can afford to set aside little every month, to build towards it.
The remaining cash flow, can then be set aside to settle your goals.
#6 Settle Bad Debt
Many people often want to clear debt as fast as possible. However, not all debts are bad debts, and going out of your way to clear good debts can even set you back further from achieving your goals.
Here are two simple questions to ask yourself to see if you are having a good or a bad debt:
- Is the interest higher than my returns that I am potentially getting from my investments?
- Is the debt being utilized to pay for a stable (ie. not volatile) asset?
If the answers to either question is a no, you have a debt that should be cleared as soon as possible.
For example, if the debt require you to pay a monthly amount every month that is higher than what you can earn passively through your investments, your debt is taking away cash flow every month. This isn’t so much an issue if the debt is used to pay for an asset that can generate cash flow or give you a roof over your head in the future, as it allows you to possess the asset with lesser capital, however make sure the interests are low enough for financial sense! Ideally, you would want the debt interests to be low enough, so that the asset that you bought with the borrowed money, can generate more returns than the rate of loan repayment. Thing to note though, the asset shouldn’t be volatile (eg. taking a loan to invest in a stock), as if things go south you may be forced into a margin call.
In all cases, be sure to juggle your cash flow appropriately for both your goals, and to clear your debt. For better clarity, speak with your personal financial advisor on how best to plan your moves to optimize your family’s financial situation.
Source:
https://www.moneyparentsg.com/post/how-to-create-and-maintain-a-family-budget-part-2
