Money management for families

Key topic

Today’s lesson is all about money management for families. Through this lesson we hope to provide you with some ideas on how to achieve financial well-being. We will discuss the importance of money and financial skills, provide some ideas about money management strategies and some tips for dos and don’ts. We will also discuss the possibility of financial setbacks and how to deal with them.

Learning objectives

• Understand the true importance of money and of financial education
• Learn about basic money management strategies
• Familiarize yourselves with some dos and don’ts for sound money management
• Learn how to face and deal with financial setbacks

The importance of money and developing a strong set of financial skills

Money itself, paper and coins, are not important. What is important is that money is a tool that can give you freedom, security, convenience and choices.

When you have money, you have the freedom to decide for things such as where you want to live or you have the choice to pay someone to do the chores you don’t want to do or don’t have time to do such as cleaning your house, doing your chores, etc. In turn, you can use the extra time to do something you enjoy. On the other hand, when you don’t have much money, choice may be something that you cannot afford; your choices are limited. The choices available to you may not really be choices at all. Without enough money, or a true scarcity of it, life can be challenging and at times even miserable. The most important use for money though is that they can help you turn your dreams into the reality you live in.

Developing strong financial skill can support both your motivation and the attainment of your financial goals as it allows you to choose the lifestyle you want to have, support your family to the best of your ability, experience hopefully the freedom to do what you want, when you want to do it, and live without the stressors and negative emotions often associated with financial struggles.

You want to support and provide for your family the best possible care and material goods. You can’t afford to neglect good financial practices and avoid planning and managing your money wisely. You are probably married, you have at least one child and thus without sound money management, your financial lives might start looking like mazes.

Financial skills are skills related to the understanding, evaluation and management of your financial resources and the creation of wealth. They also relate to your capability to use relevant knowledge and understanding to manage an expected or unpredictable situation in order to solve a financial problem and convert it to a benefit or opportunity. These skills can be acquired through financial education. Some of the most important of these skills are:

• Setting up a budget
• Balancing a checkbook
• Building credit and managing credit cards
• Being a conscious consumer
• Committing to saving money
• Insuring yourself, your assets, and your family, adequately
• Investing
• Understanding and utilizing interest rates and managing debt
• Planning your retirement

Before continuing with the rest of our lesson, let’s watch a short clip which we believe is quite informative:

Steps for Money management and financial planning

Budgeting and its importance

There is this misplaced belief that people who have lots of money don’t need to follow a budget. A family without a budget is like a team with a coach who does not know their players. Every family needs a budget in order to know where they are, to know where they can get and how to get there. Like corporations and professional clubs, individuals and families need budgets.

A budget is a summary of your expected income and expenses for a period of time, usually a week, a month or a year. While the word budget is negatively connected with restricting your spending, a budget actually means efficient spending.  Creating a budget can be done in a few simple steps.

There are numerous benefits to having a budget, such as:

• Budgeting helps you save more– When you budget, you can see which of your expenses are unnecessary and eliminate them easily. That is on top of what you initially choose to save. You’ll therefore be able to save more.
• It helps you prepare for emergencies– Life is filled with unexpected surprises; unfortunately, many of them unpleasant. This is where the emergency fund comes in. Your savings and budget should include an emergency fund that consists of at least 6 to 12 months, worth of living expenses. Moreover, your budget will help you build that emergency fund and how much you can afford throwing in it.
• It helps you avoid overspending– Far too many people live on credit and when the month is over, they end up with more expenditure than earnings. When you see your finances written down and realize that you spend more than you have, you are able to understand how damaging that is. It thus becomes easier to reduce your spending.
• It makes bad spending habits apparent– Bad spending habits are those that we should drop. Having a budget will highlight them further, since it can help you identify your bad spending habits.
• It shows you where the money goes– Which is important for different reasons, but is also important in and of itself. Knowing where your money goes will enable you to adjust your spending to meet goals; be they for saving purposes or other things.
• It helps you keep up with your financial goals– Keeping a budget helps you evaluate your financial goals. Are you doing well? Are you on track? Should you change anything? The answers to all these questions are hidden in plain sight on your budget.
• It reduces money-related stress and anxiety- A lot of people go through a lot of stress due to their finances. Having a budget reduces that stress and anxiety that may even translate into mental health issues. Since you have everything written down, the burden feels lighter and the element of uncertainty is greatly reduced. Otherwise, you might end up doing calculations in your head which can just exacerbate the anxiety and the stress.

Let’s remind ourselves what we need to create our budget:

1. Try to gather any financial documents you have available like bank statements, insurance bills, electricity and water bills, and any other information regarding your sources of income or expenses which you will use later in the process of creating your budget.
2. Write down all your sources of income. These may include your salary, business income, income from investments or any other source. Record this total income as a monthly amount.
3. Write down a list of all the expected expenses you plan to make over the coming month. This includes any mortgage or loan payments, insurance payments, groceries, utilities, and everything you spend your money on.
4. Then you need to separate your expenses into fixed and variable. Fixed expenses will be relatively the same each month and are essential for you, things like mortgage or rent, electricity, internet service and so on. Variable expenses will change from month to month and may include groceries, gasoline and expenses for going out. Variable expenses are what you can adjust if you find yourself in a negative balance when doing your budget.
5. Now calculate the total of your monthly income and monthly expenses and if you have more income than expenses, you are off to a good start. You can use this excess for savings or any other investments, or even repaying early any outstanding loans you have. If your expenses are more than your income, you will need to start making some cuts on your expenses or find ways to make more money!
6. Try to adjust your spending so that your inflows and outflows are equal. This means all of your income is accounted for and budgeted for a specific expense, savings goal or investment.
7. Review your budget on a regular basis in order to stay on track. At the end of the first month (and second and third) take some time to compare the actual expenses you made against the ones you wrote down in the budget. This way you can see where you did well and where you need improvement.

Try to create a budget which includes all your fixed and variable expenses, which is realistic and review it constantly. The most important thing though is to stick to your budget. If you think you need help with creating your budget you can start working with a financial advisor who will guide you all the way and will make you accountable thus making it easier for you to stick to your budget.

Let’s watch a 6-minute video on how to manage your money using the 50-30-20 rule.

Managing your money using the 50-30-20 rule

Money management strategies for families

“Mo Mney, Mo Problems” is the title of one of the top hits American rapper Notorious

B.I.G  wrote back in the 90’s, describing the struggle of managing increasing levels of income. Smart money management is essential for achieving family goals, not only at the beginning, but through all stages of your career and life. You need to make sure that you have a roof over your head, food on the table, money for medical emergencies, possibly money for your kids’ education; all these and many more responsibilities while raising dependent little humans.

There are unlimited ways and strategies to manage money. Below we propose 6 money management strategies that any family can easily implement, regardless of its level of income.

1.  Track Where You Spend Your Money
You need to have a clear picture of your spending habits, so you will have to pull out all your bank statements, utility bills, ATM withdrawals and any electronic payment records. Use a spreadsheet or just paper and pen and total your expenses.

You can separate your expenses in needs and wants or be more detailed and separate them in categories such as entertainment, food costs, travel and transportation, etc. Total each category to see where your money goes. Once you do that you will see and notice things  that you would never have before. You can identify unnecessary and inefficient expenditures and be in a position to remedy them, if that is necessary. Also, without tracking your consumption, you cannot have a budget and if you “run” a family without a budget, trouble will ensue.

2. Create an emergency fund
Living paycheck to paycheck is not only irresponsible but it’s also very dangerous, particularly with people – your children – depending on you. Any decrease in your income, caused let’s say by a sudden termination of employment or an exogenous factor such as a financial crisis can wreak havoc to your life and even worse, send you to a spiral of debt.

When handling finances, it is always good to have at the back of your mind that everything might go wrong, and your objective is to prepare to the best of your ability for such a contingency.

The rule of thumb to creating an emergency fund is to have about six to twelve months of living expenses in a liquid account in case anything bad happens. If you are the kind of person who needs gradual change, you can start by setting up an automatic deduction of 5% of your paycheck and transfer it to a separate emergency account. If you want to build up your emergency fund faster, you can increase this rate to a percentage you feel comfortable with.

3. Create alternative sources of income
You might have the feeling that the money you and your spouse are currently receiving as salaries are enough to ensure you a good lifestyle, while providing everything you want for your children. However, it is always a good strategy for several reasons to multiply your revenue streams and earn money from different sources to ensure that you are not dependent upon one income. Keep an eye out for investment opportunities, which can be anything from stocks and real estate to investing in new companies and start-ups. Devote some time to research, seek some professional advice and then invest. Remember, though, do not commit any money that are essential to you and your family’s wellbeing.

4. Automating your finances
The most difficult part of implementing and sticking to any money management strategy is finding the willpower to do so and making the effort. Being your own worst enemy in this case, you need to remove yourself from the equation by automating your savings, bill payments and investments.

Simply create a different bank account for each purpose, such as an emergency fund, savings and investment accounts and have money automatically deposited to each account every month. This way you can achieve specific goals by systematically creating positive long-term habits while fighting the temptation to deviate from your financial plan.

5. Saving for retirement
Retiring does not always mean that you will stop working; it means not having to work for money. To be able to do that, you need to create passive income through a retirement fund that will pay you a stable income every year for the rest of your life. To create such a fund, you need to start with a principal amount, $100,000 for example, which you will invest in a mix of investments that will give you a return of 5% a year, or $5,000. Then you can pay yourself 4%, or $4,000 and leave the 1% to be reinvested. Building a retirement fund that can produce income for the rest of your life should be the ultimate goal of any money management strategy.

6. Have a Plan and stick to it
Once you know how much money you earn and how much money you spend, you need to make a plan. This plan needs to align your financial goals with your spending habits. It needs to prioritize things into primary, secondary and tertiary objectives. For example, if you have just a few days a year for vacation and you love spending this time with your family in a tropical destination in Southeast Asia, you can easily fit the necessary cash outflows into your spending plan. But, if you have set as a priority to buy a house by the end of the year, then you will need to plan cutting expenses elsewhere and modify your long-term spending plan to accommodate such a large outflow. Once you create a plan, give it a try for at least a month. You need at least a month to see if it works for you; anything less than that and you won’t see the benefit of keeping an eye on your finances.

Money management tips

So having discussed some very useful money management strategies, we now turn to providing some useful tips regarding money management. These dos and don’ts can help you construct a framework that will help you apply the above strategies effectively and coherently. Although, money management has to be carefully tailored to the specific realities, conditions, needs and wants of each individual and family, there are some rules that should never be violated and/or always followed. So here are a few tips tailored for families:

• Prioritize needs and live within your means – Living within your means that you spend less than you earn. In order to do this, you need to sit down with your spouse/ partner to discuss the family’s needs –what is vital – versus wants—what is desired. Obviously, needs come first as we kept stressing throughout this course.
• Build and sustain good credit – Paying your bills on time is very important because it will help you build a both a good credit score and credit history. The better your credit score, the more willing banks are to loan you money on favourable terms. They will, for instance, most likely offer you a better interest rate since a good credit score lets them know you are low risk and will pay on time.
• Identify spending habits and attitudes – This links back to the first point. You and your spouse/ partner will be more likely to handle discussions and challenges orbiting around finances in healthy ways if you both have a sound understanding of yours and each other’s spending habits and attitude towards money.
• Avoid (bad) debt– Choose credit cards with a low interest rate when possible. Even better, avoid using them altogether, if that is realistic or just pay the balance in full every month. If you have debt from credit cards or other loans you owe, try to pay a little extra each month on the card with the highest interest rate. Credit card debt can be a deadly trap if left unattended. Americans owe over $800 billion in credit card debt.
• Although obvious, don’t buy things you can’t afford– If the only way you can afford something is using a credit card, then that’s probably a sign that you can’t really afford it. Even interest-free offers just postpone the pain. Do it the traditional way and save in order to purchase.
• Avoid payday lenders– Payday lenders charge high fees that multiply quickly if you miss a single payment.
• Set goals together– If you haven’t done this years ago, then sit down with your spouse/partner and discuss about different goals you can set to help work toward that future. Start with small goals like jotting down your household monthly budget. You might even want to include your children in some of these discussions, particularly if it concerns them. It may help them mature and even assist you in achieving said goals.
• Give it time, don’t rush into it– When faced with a decision, especially about a big purchase, it’s wise to give yourself time and space to think. We often tend to spend more when we’re emotional. Removing the emotion and thinking with a clear head gives you a chance to consider whether you really need the item you’re purchasing. So, next time you’re about to make an important purchase, you may want to sleep on it… for a few days.
• Avoid financial “infidelity”– The don’t-tell approach is not a good one to follow when it comes to spending money and handling family finances. Keeping your wife             in the dark about those $2,000 you spent during the weekend in Vegas with your friends, or not telling your husband that the new handbag cost hundreds of dollars is not a good strategy for communication and trust in a relationship. Financial issues constitute one of the most cited factors behind strained relationships and marriages in both Australia and the US, scoring well over 30% in both countries.

Action steps – Exercise 1 (15 minutes)

• Are you following any of the money management strategies we have just discussed? If yes, which ones and how have they helped your family’s finances?
• Have you ever tried to have your children participate:

1. in your money management strategies
2. in the household financial discussions

• If yes, when and did they rise to the challenge?

Financial setbacks and how to maintain a positive attitude

Financial failures and setbacks are unavoidable in life. It is true that we all had that time in our life when we had our financial hardships, sometimes mild and sometimes severe. What we have to realize is that the most successful people around the world are the ones who have failed the most to reach high, even if we only know and see the ‘bright side’ of their success and admire their achievements.

In today’s world, where we are flooded left and right with tons of information, we hear about financial success stories of individuals almost on a daily basis; something that the clinical psychologist Jordan Peterson partly blames for our perceived unhappiness. It  is natural to compare ourselves and our situation to theirs, and feel ashamed for failing or not achieving as much financially, at a personal level. Such feelings of shame though, may lead us into the darkness of depression.

As people who head families, failure, or spiraling into depression because of failure, is not an option. You have people depending on you and you owe it to them and yourselves to get right back up and get back at it. This applies to all aspects of life including finances. When you’re responsible for providing and caring for several people including yourself, in a hostile word that is constantly bombarded with health, financial and social crises, then finding yourself financially strained is probable, understandable and nothing to be ashamed of. A lot, if not most families, will experience financial challenges (maybe several times) throughout their lives.

The British novelist J.K. Rowling, expresses her opinion about failure with the most inspirational quote: “It is impossible to live without failing at something, unless you live so cautiously that you might as well not have lived at all–in which case, you fail by default.” Therefore, when faced with financial setbacks, stand-up, gather your pieces and rise from your ashes by just following the below four simple steps.

STEP 1. ACCEPT IT
The first and most important step for financial recovery is to accept reality! Accepting any situation in life makes you understand that a setback or a failure is not your final destination, but a stepping-stone in your journey to financial freedom.  You have to realize that failure is part of the process to succeed. Yes, you will experience difficulties, you will repeatedly get disappointed and upset, but you have to stay focused on your target and not let it bring you down.

STEP 2. “UNBLOCK” YOURSELF
After the acceptance stage, there is always an emotional stage which must be handled really carefully and with full awareness of the situation. After you have taken some time to realize and accept the situation, you have to clear your mind from any negative thoughts. Don’t let yourself be overwhelmed with feelings of misery. After all, once the harmful emotions finally dissipate, you will then be able to see clearly and turn your focus to recovering.

STEP 3. REFLECT
Reflection is a synonym to thought, meditation and consideration. Three words with high importance for every person who wants to operate under the control of their own power and who want to learn from their mistakes and not repeat the same action again and again and expect a different result. Reflection might be the most critical step and many people do not take it seriously. It’s simple but invaluable. You have to take some time to reflect on what happened and it is extremely important to be harshly honest with yourselves on why it happened. When you reflect on something, you obtain the skills to answer these three vital questions:

• What went wrong?
• Why this went wrong?
• How can I fix it?

STEP 4. TAKE ACTION
Your actions are what actually define you as a personality. Nothing really happens, until you take some action. It’s not only about just thinking and dreaming. The actual work is that you have to make the right decisions and act wiser without falling into the same trap. Your actions are what will lead you to achieve your goals and success. Many people envision improving their finances, but how many of them really take action? And that is what makes all the difference. The difference between successful people and unsuccessful ones, is the capability to steadily and consistently convert their ambitious thinking into actions toward achieving their goals.

Lesson wrap-up

Today’s lesson was about money management habits. We began by stressing the vitality of financial literacy and the importance of money. We then turned to highlighting the benefits and importance of having a budget and in what ways it can assist us in our lives. Next, we provided some money management strategies and tips. Finally, we turned to financial setbacks and stressed that financial hardships are inevitable for most people. The key is to possess the right attitude and will to face and deal with them.

At this point we will wrap up today’s lesson. First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have. Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate your athlete kids, and your family!