Why is it that with the same income some people have enough money for vacations and repairs, while others don’t get out of loans? The most important thing is to plan your budget wisely, leaving money for subscriptions and titles from a list of casino games. Here are a few techniques and tips for managing a personal budget that anyone can use.
Types of Family Budgets
Every family has its own ways of managing money. Sometimes one person manages everything, other times decisions are made together. It’s customary to distinguish several types of family budget:
- Joint. The finances of all family members are combined to pay for expenses. In this version, it doesn’t matter who earned how much – all funds are shared.
- Separate. Each member of the family manages their own money without having to answer to the rest of the family. Expenses are paid by agreement. For example, the husband can take care of the mortgage payments and the wife can buy groceries.
- Mixed. Family members contribute their share to the common budget. This can be the same amount for each, or a certain percentage of income. Shared money is used to pay for joint expenses, such as rent and groceries. Everyone handles the rest as he or she wants.
There is no way to say that any of the options work better. Every family has its rules. The main thing is that everyone should be satisfied with the way they manage their budget. Options may also change depending on the circumstances. For example, the emergence of children or the loss of a job almost always lead to a revision of the way of managing finances.
Why Keep Track of Income and Expenses
The need for keeping a family budget is not always obvious. Usually people give up planning for two reasons. Either there is enough money for everything, and keeping track of income and expenses seems like a waste of time. Or funds are scarce, it’s impossible to save, and budgeting seems pointless.
In fact, financial planning does not depend on the size of income. It’s used for budgets of all sizes. Keeping track of all expenses and receipts allows you to properly organize the family budget. Here are the benefits of planning:
- Reaching big financial goals. If the income isn’t large enough to afford serious purchases at any time, money has to be saved. For vacations, repairs, or a car. To do this effectively, you need to calculate a budget.
- Forming a safety cushion for unforeseen events. Sickness, job loss, and other surprises always lead to extra expenses. Financial planning allows you to prepare for such events by creating an “emergency fund.” This also includes the purchase of insurance that prevents holes in the budget. For example, you can take out an accident policy, insure children against sports injuries or protect real estate.
- Cost optimization. Unplanned small purchases make up a significant portion of family spending. Many people are horrified to look at the numbers after the first month of budget analysis because they didn’t know how much money was being spent on nonsense. Keeping records helps you find weaknesses and reallocate your finances more intelligently.
How to Budget for the Month
Most people allocate finances intuitively. This is far from rational planning. The main disadvantage of the intuitive scheme is that most of the money is spent as soon as it comes in, and you end up with little left in your hands that needs to be stretched out for a long time.
Unscheduled spending, which almost always happens, creates a dilemma: to half an already meager budget or go into debt.
The Six Pitchers Method
The essence of the method is that you distribute money not by weeks, but by categories in various proportions and at once for a month. This should be done as soon as you receive your income. So, the money is distributed as follows:
- First pitcher – 55% of income for mandatory monthly expenses. For example, groceries, housing, transportation, utility bills, etc.
- Second jug – 10% of income for entertainment and leisure (going to the movies, the theater, spending on cafes and restaurants, etc.).
- The third pitcher is 10% of income for savings or investments. The goal is to form a passive income, to prepare the financial foundation for the future. You cannot “take out” money from this category and spend it on other needs.
- Fourth jug – 10% of income for self-development: education, coaching, buying books, etc.
- The fifth jug is 10% of your income for a financial safety cushion. This is money for “rainy days,” as well as for major purchases such as buying a new refrigerator, a vacation trip, urgent car repairs, and other expenses.
- The sixth jug is 5% of income for charity and gifts. And no colleague’s birthday or friend’s wedding will take you by surprise.
How to Stay Within Your Budget
Document All Expenses
There are a lot of handy and free apps that will count all your expenses for you, break them into groups and make a report for a week or a month. For example, CoinKeeper. Such apps allow you to identify unaccounted expenditures, the very holes in the budget, through which the money is flowing away. But it only works effectively if you conscientiously enter every expenditure into the program, down to the purchase of gum.
Small expenses that we don’t even remember at the end of the day add up to a tangible sum by the end of the month, comparable to paying for utilities or anything else in the obligatory expenses line. Analyze expenses and think about what you can do without.
Compare Prices From Different Stores
Apps and online price monitoring services are here to help you. Make a tentative shopping list for the next month. Include only major or recurring items you won’t give up for sure: pet food, haircuts, new headphones, etc. Then “check” all of these items through price monitoring services. Maybe a haircut next door will cost 30 percent less than the house across the street, or store X is having a promotion on cat food and you can save up to half its cost.
There is a whole subculture of bargain hunters. They create groups in social networks, where they share information about discounts and promotions. The main thing is not to get carried away and not to buy for the excitement. You can also use aggregators of promotions and discounts. Some even have coupons that give a discount to the user of the app.
Set a Spending Limit on the Card
Relevant for those who like to turn on the shopaholic in the first days after the paycheck, and the remaining weeks to save excessively. On almost any card you can set limits on online purchases or cash withdrawals: the bank will not let you spend more than a certain amount.
The most advanced version of optimizing your budget is a personal financial advisor, who will advise you how to allocate your money more efficiently. It’s not cheap, but it pays off if you earn a lot and spend a lot.