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Personal finance can be quite challenging for the uninitiated. But when you add your dependent parents, your spouse, and your child or children to the mix, it can get downright tricky. To get your home finances or household finances right, you need to put in a great deal of thought and engage in careful and thorough planning.
On the upside, if your spouse and/or your parents are also earning members, or if they have some source of income to rely on, that means more earnings for your family as a whole. But the flip side is that the expenses and the financial goals are also multiplied simultaneously.
So, how do you balance the books and manage your home finances smoothly? As with every aspect of personal finance, there is no single golden rule that can miraculously make household finances smoother. Fortunately, however, there are several tips and tricks that can help you navigate these tricky waters easily.
Here are 5 steps to help you manage your home’s finances like a boss.
Step 1: Identify your family’s expenses
The first thing you need to do is identify the essential expenses for every member in your household. Some expenses may be common for all members, such as grocery bills, utility expenses and other needs. Others, like fuel costs and transportation expenses may be specific to the working members of the family. Your children may have their own set of essential expenses too.
So, take into account all the essential costs and write them down. This will give you a fair idea of the amount that will definitely be spent each month. Remember to exclude discretionary spends from this list. You can set aside a separate amount for your wants, after you have allocated funds for your needs and goals.
Step 2: Account for your individual and your family’s goals
Just like the expenses, the goals for every member in your family are also bound to be different. Your individual goals may include buying a new bike within the next 3 years, or saving up for your retirement. Your spouse may want to save up for a down payment on their dream family home. Your parents may want to travel to certain places that are on their bucket list. And your child may have specific educational ambitions to fulfil.
Your home finances need to accommodate all these goals. And you will have to save up or invest your common earnings accordingly. To create a competent plan to accomplish these goals, you need to be sure of what the goals are, in the first place. So, that’s what this step is all about.
Step 3: Prepare a family budget
Once you know the expenses and the goals that you need to pay for with your family’s earnings, you can get started on your family budget. There are different budgeting rules that you can rely on to make your home finances more manageable. For instance, you can choose to adopt the 50-30-20 rule, the 70-20-10 rule or even the stricter 30-30-30-10 rule. These rules all help you assign specific percentages of your household income to different heads of expense.
Alternatively, you can also decide to use your income for specific expenses, and your spouse’s earnings for other heads of expense. For instance, your income could go towards paying your EMIs and your children’s school fees, while your spouse’s income could be used for everyday essentials. Figure out what works best for your household and stick to the budget.
Step 4: Leave room for adjustments
Your home finances, unlike your personal finances, may be subject to a greater number of changes over time. Since there are more people involved, the probability of unexpected expenses cropping up is higher. The chances of a medical emergency also increase. Additionally, your children may present unexpected expenses or requirements for their schooling.
To account for these contingencies, it helps if your budget has some wiggle room. That way, you can make adjustments without experiencing any undue financial stress. If you account for every rupee, you may not have any funds left for emergencies. So, it’s a good idea to set aside a portion of your finances for these situations.
Step 5: Revisit your budget periodically
Lastly, you will need to revisit your budget periodically to ensure that your home finances are in order. A good rule of thumb is to do this every six months or so. Additionally, you may also need to revisit and revise your budget at crucial junctures, such as when a loan is fully repaid, when you avail a new loan, when your child graduates into high school or college, and even when your dependent parents retire.
Events like these may increase or decrease your family’s total expenses or income. So, you will need to alter how your home finances work accordingly. Remember that it is not set in stone. And that’s why you need to periodically assess if your combined income is spent on your common and individual needs, wants and goals.
As you can see, managing your household finances involves a great deal of insights into what every member of your household earns and spends. So, it is also a good idea to share the budget with your family. That way, everybody involved knows how the finances stand and what they need to do in order to make it easier for you to manage money more easily. It is, after all, a team effort. And that family that budgets together, stays together.
This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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