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Why you need a budget for your family’s finances

Budgeting and financing is a crucial consideration. It helps you stay aware of your monetary incomings and outgoings, and gives you a good basis for making smarter money choices. With a budget, you’re better placed to assess and achieve your purchasing, investment, and retirement goals.

Many people know the benefits of budgeting, but fail to make workable plans. However it’s incredibly important when it comes to coordinating family finances so you can achieve your short and long-term goals. When it comes to family financing, there are three main components to consider: budgeting, saving, and planning for contingencies.

Budgeting and saving

The annual household budget

Take stock with a year-long snapshot of your monetary incomings and outgoings.1 When you do your budget, add up all your regular and other significant incomings and outgoings, such as your mortgage, rent, utilities, phone, car repayments, and groceries. Other than your total annual household income, you should have fixed expenses and variable expenses, which are then broken up into further categories such as mortgage repayments, entertainment, essential groceries, and dining out.

Need some help? The Australian Securities and Investment Commission have designed a budget planner that helps you organise and address every aspect of your finance plan.

Establish a realistic spending and savings plan

Once you have the total annual figures for income and expenses, you can go through these to work out what expenses you can easily cut back on.2 New clothing you don’t need, extra data on your phone, pay-TV subscriptions (versus pay-per-view one-off fees), and eating out are some categories you can easily cut back on. Brainstorm the different ways you can save more on food, entertainment, kids’ expenses, and everyday household expenses.3

The goal here is to have a clear savings plan with actionable steps for cutting back on expenses and putting away extra money. But remember to give yourself and your family rewards occasionally, so it’s not too onerous to stick to your new budget. Review your spending and saving targets to make sure they’re realistic.

Similarly, if changing your money behaviour overnight is challenging, do it gradually by picking one habit this week and adding another next week, and so on, until you’ve adopted many habits that help you spend less and save more.2

“Consolidating your accounts is a simple solution, which makes it a good place to start. It’ll save you money on fees and reduce the risk of losing track of accounts and incurring charges.8

Paying down debt

Other than your mortgage, you might have other forms of debt that are more urgent to pay down, such as credit card debt. If you have significant credit card debt, work to pay that down first, before other lower-interest debts. You could also be proactive and contact your bank about getting a lower interest rate.

If you’re looking for extra ways to get rid of your debt faster, finance specialist Holly Johnson from The Simple Dollar argues one of the most effective ways to pay off debt quickly is to pay off more than your minimum repayment.

“Whether you’re carrying credit card debt, personal loans, or student loans, one of the best ways to pay them down sooner is to make more than the minimum monthly payment. Doing so will not only help you save on interest throughout the life of your loan, but it will also speed up the payoff process.9

Setup a savings goals

Unless you’ve won the lottery or have a sizeable inheritance, setting a savings goal and sticking to it is the best way to establish a solid foundation for the future. By getting into the habit of saving money, you’ll avoid living week to week, and you’ll reach major milestones such as saving up for a housing deposit, paying off your mortgage, and taking that overseas holiday more quickly, even while you meet your ongoing expenses and living costs.

Make sure your savings goals are sensibly balanced between consumption (e.g., buying a new car or taking a trip overseas) and wealth-building goals (e.g., buying shares or investing in property).

Automate savings

Saving money can be made easier if you automate it, and make the money less easily accessible. As you set up your budget, work out what percentage of your combined household income you can realistically put away each month, and have this amount paid out into a dedicated high-interest saving account each payday.4

Endorsing this strategy, Rob Berger from Forbes believes saving before you spend is the best way you can achieve your financial goals.

“Remember that the goal of budgeting is to spend less than we make (i.e., to save money). One of best ways to do this is to save first. Rather than saving what is left over at the end of the month, save first and spend the rest. This strategy takes advantage of behavioural finance. By getting money out of your checking account and into savings first, we are less likely to spend our savings during the month.10

Also, try to forget about your savings account until you’ve reached your savings target. This is money you can use for paying the deposit on a house, buying a car, making extra mortgage repayments, investing, or making extra super contributions.

Updating your budget

Once you’ve finished setting up your budget and listing savings action steps, you’ll periodically revisit your budget to update it, adjust it, and tick off milestones. Remember there are many tools such as apps that let you track your spending on the go, whether you’re at the grocery store or need to check your daily spending.5

Have an emergency cash fund

Although most of us would probably prefer not to think about it, unexpected things can happen at any time. If you’ve planned carefully for your family’s finances, it’s more likely than not you’ll be able to weather those unexpected events.

Having an emergency fund offers you peace of mind, and ensures you and your family can continue to meet your financial obligations if something unexpected happens.

It’s been suggested that families should have at least six months’ worth of savings in accessible cash in their emergency fund.6

Philip Taylor from PT Money believes the best emergency fund is readily accessible, but not connected to your daily spending’s account.

“The fund should be kept somewhere where you can get to it in your time of emergency. But I tend to think it should be kept far enough away so that you can’t spend it on day-to-day spending. This means, don’t keep it in your safe, regular checking account, or the savings account attached to that checking account.11

Look for high interest savings accounts, to help your emergency fund grow. Some banks offer accounts that reward you with increased interest rates when you don’t touch your money for a set period of time. Consider using one of these, as it’ll offer you an additional incentive to leave your emergency cash alone!

Income protection insurance

Income protection insurance is another way to plan for risks, and ensure you and your family are protected if you do encounter an emergency.

Illnesses and sickness

Generally speaking, income protection insurance covers most types of illnesses that leave you unable to work.

Longer-term income replacement

Income protection insurance can pay out a significant percentage of your former income over a long period of time, until you’re able to return to work. This is so your family can keep up with its expenses, and help you get back on your feet more quickly.

A good thing about income protection insurance is it’s usually tax deductible.7 Note that income protection insurance isn’t the same as critical illness insurance, or short-term income protection.

We recommend that you speak with a qualified professional in relation to your finances.

This is general information only and does not take into account your personal circumstances or needs.

Real Insurance is an award-winning provider of income insurance.

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