My Personal Finance Blog

It all starts with a simple step – make a budget! The most important thing about improving your family finances is to get a clear picture of exactly where you stand. Once you know that, you have a clear understanding of the positive and negative aspects of your financial position you can identify clear steps to take in order to move forward, and improve your finances.

A budget is the backbone of any financial endeavour – whether you are running a business or a household. You must be clear about what financial responsibilities you have, as well as be clear about what your income sources are. The key here is to be completely open and honest with yourself – if you’re not, the whole exercise is futile.

It’s also important to identify financial goals for yourself and a clear timeline in which you want to achieve them. Examples may include going on a holiday, buying a car, paying off existing debt, or buying a house. No matter what the goal, make sure you have a set date you want to achieve it.

To speed up the achievement of your goals, take steps to increase savings, income streams (if possible) and reduce your level of debt. Your personal debt is money you give to someone else each time you have income, so obviously if you reduce those debts, you’ll improve the amount of investable (not disposable) income.

Pay off your credit cards, then cut them up to make sure you don’t run them up again. Pay extra – as much as possible – on your debts to repay them earlier. This will usually save you money because the longer you have these debts like a car or personal loan, the longer you are charged interest. The more you pay on the debt, the less interest is charged and you can pay it off quicker because you are reducing the principal amount of the loan.

If you’re like most people you will have multiple interest incurring debts. You can attack your debt using a number of strategies. Personally, I like to repay smaller amounts first, because the psychological impact of removing a debt from your list of liabilities is fantastic. Plus, the amount you used to pay on the smaller debt can then be snowballed onto other debts – reducing them quicker. Other people may like to repay any extra they have on the debt which is incurring the highest amount of interest. The bottom line is that you should do whatever suits you and your goals.

With Christmas behind us, 2011 looks as though it could be a tough year money wise. January is therefore the perfect time to review your finances and start a plan to keep out of debt.

Christmas is traditionally the time for overspending and indulgence, but with January already upon us, credit card bills will soon start appearing on the doormat.

And with 2011 predicted to be a difficult year for family finances with increasing costs of living and many incomes reducing in the wake of the government cuts, now is the ideal time to review your finances and make sure that you avoid debt problems.

Understand your current financial position

For many people, reviewing their finances can be a daunting task. But giving yourself a financial makeover does not have to be difficult. There are some easy steps to follow:

The first thing to do is understand exactly what your financial situation is.

This sounds like common sense, however, I am constantly amazed at how many people go from month to month with very little idea of how much money they have coming in and the living costs they have to pay for.

If you do not do this already, you should identify your monthly income and essential expenditure budgets by listing all of your monthly income and living expenses. The Beat My Debt expenditure guide will be a great help with this.

By deducting your essential expenditure from your income, you will be able to see how much you have left over – your disposable income – either to save or pay any unsecured debts.

No outstanding debt – plan to save

List separately any unsecured debts that you have outstanding and which need to be paid.

If you have no outstanding unsecured debts you are in an enviable position. If you are not already, you should then take the opportunity to start saving so that you have money available if and when you face financial challenges down the line.

If you do not find saving easy, then the best way to achieve it is to plan to save.

By this I mean you should first decide how much of your disposable income you want to save each month. Then arrange to save this amount at the beginning of the month.

I recommend saving your budgeted amount as soon as your money comes in as if you wait until the end of the month, all too often the money you had planned to save will already be spent.

Affordable outstanding debt – get a savings safety net

If you have sufficient disposable income every month to maintain any monthly debt repayments, the standard advice is then to try to pay off more to reduce your debts as fast as possible.

However, if you have any spare cash, unlike many other financial advisors my advice is to first save this money to build up a savings safety net.

Set a target safety net amount. This could be £500 or even £1000.

This safety net can then be used if you face any financial difficulties such as an unexpected car repaid bill or your washing machine or fridge freezer breaks down without having to increase the balance on a credit card.

Once you reach your savings safety net target amount, then is the time to direct your spare cash to paying off additional amounts of your debt so that the debts are paid off more quickly.

Outstanding debt which you cannot afford to pay

If having reviewed your income and expenditure, you find that you do not have enough money each month to maintain your required debt payments, you need to take action or risk getting into a significant debt problem.

Not having enough money to pay everything each month means that you must be maintaining your expenditures by increasing your borrowing. Perhaps your overdraft or a credit card balance is slowly increasing.

If you allow this situation to continue for too long, eventually you will get to a point where you are at the limit of your credit facilities and face not being able to make your payments.

It is best to take action before getting to this point by using a debt management solution such as a debt management plan (DMP) or individual voluntary arrangement (IVA) which will help reduce your debt payments to an affordable amount.

Take action

Whatever your financial situation, January is the ideal month to review your financial circumstances.

If you feel you are struggling financially, taking the opportunity to carry out a financial makeover is now more important than ever with the financial difficulties set to face everyone in 2011.

If you follow the simple steps outlined above, you will be far better equipped to deal with the New Year.

You will ensure that you either keep out of debt or start a plan to get back in control of debts which you already have.

The financial fortunes of most families tend to fluctuate over time. However, everyone wishes to have a smooth, well planned finance plan in place, so that such fluctuations do not affect them adversely. Hence, a proper planning is necessary for maintaining the economic balance of a household. Family finances need to be handled expertly, so that a household can face any possible economic scenario. Indeed, most of us often do not have the skill or expertise to perform finances managing tasks properly for ourselves. Hence, expert advice from financial advisors is often sought for in this regard.

While handling finances for families, most professional financial planners would provide certain basic tips to their clients. Such useful guidelines for effective financial planning for family include the following:

o Proper finances managing require that families do not spend too much on rather unnecessary, luxury items. Rather, focus should mainly be on buying the necessary items,

o For successful planning, individuals need to have specific targets and goals, regarding the rates of return or savings they (s)he wishes to achieve from the finance markets. Such financial targets, however, need also be realistic, so that they remain achievable, providing the desirable benefits to families at the same time,

o A family need to be prepared at all times for an emergency situation. Unnecessary expenses can be cut down , provided the necessary prior financial arrangements are in place,

o There are several tax benefits and incentives that are offered from time to time by the authorities. Taxpayers can avail of these benefits effectively,

o People should have an eye on the future while managing the finances for their families. Probable changes in the economic scenario should be kept under consideration too,

o Retirement planning and estate planning are two of the most important components of financial planning for family. There generally exists a trade-off between the two as well. Retirement planning requires individuals to store away a portion of their income in view of their impending retirement. This brings the money currently available for spending on new estates. Hence, a proper balance between these two components need to be achieved,

o For effective finances managing, families need to identify the main crisis situations that they might be faced with. The major crisis situations for a family include pay cuts, loss of jobs, health-related problems, divorce, or even natural disasters. A proper strategy to guard against the impact of such scenarios should be present.

Handling family finances in a wise, informed manner can prove to be a tricky affair. Hence, it is imperative that people take into account all aspects of planning, and, if necessary, hire the services of a professional financial advisor.

Creating a family budget and implementing it is something that you and your spouse or partner should do together. It makes sense considering you are both using your family’s money. It’s even a good idea to get your kids involved in the budgeting as well. Get together as a family and talk about why your family must live on a sound budget and what financial planning is involved. Teach your children about the income and expenses data you fill out as you work your way through the financial process. Tell them about your current income and spending numbers, let them understand how much less money your family needs to spend each month, and ask your children for budgeting ideas, including expenses that they are willing to give up. Also, discuss with them any budget cuts you plan to enact that will affect them directly.

At the end of every month, get the family together and compare your budgeted spending to your actual spending. Have a small celebration if your family’s spending is in accord with the family budget by doing something inexpensive activities together – maybe go out for pizza or go to the park. When your data shows that your family spent more than was budgeted, discuss with your family why you went over budget and what each of you can do to ensure it doesn’t become routine.

When your kids feel like an important part of your family’s financial planning and understand that you value their suggestions, they will be more willing to work with you, not opposed to you. In addition, they’ll be less likely to resent changes that may affect their lifestyle. Not only will this improve your family’s finances, but it will teach your children some value lessons on budgeting and making wise decisions financially. You may even find it helps bring the family closer together.

Many of us can remember our fathers working their whole lives at a single job, devoting their careers to just one company in return for a secure pension to last throughout retirement. Today, the world is a very different place: Now, the median length of time the average person holds a job is 4.1 years. The result is a dramatic change from traditional pension plans to 401(k)s and IRAs, which leave the individuals responsible for their own retirement planning.

This is just one of the many aspects of the modern world that requires people to be far more proactive about managing their finances. Anyone can execute stock trades with a click of a button. And with the help of the Internet, everyone believes himself or herself capable of being a financial expert. For women who may have relied on their husbands to manage the family’s affairs in the past, this new landscape can be challenging. More than ever, both spouses need to work together as financial partners, regardless of who generates the family’s income.

It’s not enough to be a helpmate in these situations anymore. Instead, it’s necessary to be equal allies. To be of support in your family finances these days requires active participation. Successful relationships aren’t about two people looking into each other’s eyes; success comes when two people are looking in the same direction toward the future.

When it comes to achieving lifetime goals of personal peace, family success and financial stability, one must envision the future and ask, “Am I prepared to make it through bad times, especially if someday I’m on my own?” For previous generations, finances were on automatic pilot at the point of retirement or death of a spouse, but not anymore. Today there are things like 401(k) distributions to manage, mortgage payments to make, tax implications for every dollar you give to your children and grandchildren, complex estate planning considerations and the ever present need to manage risk on many levels. It just isn’t smart to be left hoping someone else will make the proper decisions for you later on.

Being active in making financial decisions won’t just help you secure your own financial future, keeping you in the lifestyle you deserve throughout your retirement years, it will also ensure your legacy is passed on – that your children and grandchildren get what they need. Family finances are a family matter. Make sure you play your proper role in them, for the sake of yourself and your family.