“For the first time on record, the majority of people in poverty are in working families.” Joseph Rowntree Foundation, Monitoring Poverty and Social Inclusion.

Financial insecurity and dissatisfaction can affect the quality of family life at all income levels and across all races. Unlike learning how to ride a cycle or play football, many of us generally don't receive explicit instruction from our parents about how to deal with money. Instead, our attitudes are often shaped as a reaction to what we observe as children. Kids who watched their parents spend money recklessly often grow up to be financially cautious adults, and vice versa. When two people with wildly different money management styles partner up, frustration and hurt can seep into the relationship. The biggest challenge by far for us as a couple is figuring out how to manage money together. Unfortunately, no matter how close we are, we will absolutely have different opinions about our financial matters and therefore, we’ll have to work hard to listen to each other and create a system that works for both of us.

Below are some tips for managing family finances that can help us reduce some financial stress in the long run. They’re simple, but sometimes applying the simplest changes to our lifestyle can make a large and positive difference to our financial situation.

Know your paycheck and manage your tax

It is reasonable to estimate how much income is likely to be available to us and after all mandatory deductions on a monthly basis. Some of the people don’t even know how much tax they are paying. Much like death, taxes will never go away. While rules and slabs may change from time to time, taxation itself won’t. In fact, it affects every aspect of our finances, from income and allowances to in vestments as well as the assets you buy or sell. Look at it as a way of reducing your losses and increasing your gains. Take the help of a planner or tax professional if you need, but start on time. For example, if you are paying high tax, it is a time to increase your contribution to Nagarik Lagani Kosh and buy life insurance if you have not bought it already. Remember we all have options to minimize the tax legally. Most importantly, we need to plan our tax-saving investments at the beginning of the financial year by calculating how to maximize exemptions and deductions under various options. Check with your account department and start discussion.

Insurance

Most people are so intent on investing and building assets that they forget to cover their risks. Since it’s crucial to secure our family and finances by creating an adequate insurance portfolio, this is the second constant that does not change with time. A majority of people buy insurance to save tax and as an investment, with life insurance the second most favoured investment destination after fixed deposits. However, it’s important that you don’t mix your insurance and investments. The base of our insurance pyramid should comprise pure protection plans. These cover the risk of death (term plans), health issues (medical plans) and accidents (accident/disability covers). The amount of cover we take, be it life or health, will depend on our life stage, income, dependents and requirements. Next, consider insurance policies that can help us reach our goals. These include traditional (endowment) and child plans, and finally, buy plans that can assist us in creating wealth.

Prepare monthly budget and record expenses

Our decision to spend is usually motivated by “needs” and “wants.” Needs are related to essentials in life, something we cannot live without it. Whereas “wants” are usually things that we desire. More often, our “wants” are not absolutely necessary.   

At the start of each month, write down a budget. We need to set up a reasonable limit for all of our expenses. The key to making this budget work is to know where every rupee is going to go. Our income and expenses should equal the same amount. Most importantly, money that we put into our savings would be considered an expense in our budget. Please remember that we need to know what we’re actually spending. It is surprising but very few people can confidently state how much they are spending on groceries, bills or discretionary items.

Use a spreadsheet or diary to note monthly expenses. We have a tendency to ignore such small expenses and focus more on large expenses like buying monthly groceries. However, we need to ensure to add small expenses in the diary. Research shows that series of small expenses when it accumulates is responsible for creating more financial hardship for the families. We need to start by taking note of the various fees and charges that are straining our budget and reducing our savings. Whether it is debit card, credit card usage or travel planning, banking or realty transactions, we need to make sure that we don’t give away more than we should.

The next step is to look through the monthly expenses we have put down in a dairy/spread sheet and determine the needs from the wants.  This will help us to identify which items to trim to help us save more money. In other words, this helps us to identify the area where we can cut down our spending without compromising our comfort. In case of financial difficulty, this habit can save us for managing our budget more meaningfully. It is extremely important to involve everyone in your family in this process so that family budget becomes a shared responsibility. 

Try it for a month to get handle on what you’re spending. You may be surprised with the results. It is absolutely important for us to know our numbers, specially our expenses. It is also a good idea to give your child the responsibility of taking note of all the expenses so that they can also develop the habit of financial wellness from their childhood.  

Be aware of over use of Credit Card

With the advent of credit cards, it’s never been easier to spend money that we haven’t yet earned. The biggest disadvantage of credit cards is that they encourage people to spend money that they don't have. As a result, we have a tendency of overusing Credit Card. It is important to stop relying on your credit cards for almost all expenses because it adds to our debt each month and it prevents us from building wealth. Therefore, make a rule for using credit card. For example, use credit card only for monthly grocery purchase, medical treatment and maybe for restaurant bill. Except for emergency, make sure to follow the rule strictly.

Savings

Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies. Obtain rate information from multiple banks to get the best value for your money. Please note that money doubles by “The Rule of 72".  To determine how long it will take our money to double, divide the interest rate into 72. For example, an account earning 8% interest will double in nine years (72 divided by 8 equals 9).  Start saving even if it is a small amount. We have a tendency of not depositing small amount into our banks account. However, smaller amount if held for a long time will give you higher return due to compounding effect. Compounding can help us to achieve the same goal with a smaller amount of savings every year. And the earlier we start saving, the more wealth we can grow. For example, if you want to have Rs. 50,000 in a 20 years’ time, we need to set aside Rs. 187.50 per month assuming 1% return. Therefore, start saving even a small amount.

Conclusion

Finally, please note that you must review your plan, income and expenses regularly based on your different stages of life. Our priority lists change once the family circumstances change.