Family budgeting is not complicated if you systematically analyze how much money is coming in, how much is going out, and what’s left over at the end of each month. It not only makes finances simpler to manage but also enables us to save for the future and achieve distant financial goals - be it retirement or child’s education.
It has been seen that often people give up on budgeting when they fail to make it work for them. And, some mistakes can throw budgeting off-gear. Learning about some common budgeting mistakes can reduce your odds of making them.
1. Ignoring small expenses
Often the focus of the budget is on large expenses. While it is important, ignoring small expenses could mean getting the numbers wrong. A daily coffee at Barista on your way to work might cost only Rs 100 a day. However, it adds up to Rs 2000-2,500 over a month. Similarly, a parking fee, foot spa, car cleaning expense or a toy purchase might seem a trifle but adds up to a sizeable amount if taken together. So, don’t ignore any of the expenses.
To start with, keep a daily account of expenses in a small notebook or in an excel sheet. In two or three months, you will get a hang of all your expenses, which can then be bucketed into broader categories like housing, food, entertainment, savings, debt repayment and so on.
It is important to come together and share financial information. It will not only provide a big picture of family finances, but also help achieve future financial goals.
2. Keeping up with the Joneses
My neighbour bought a Mercedes. I also need to buy a similar one? Sometimes the purchase decisions of a family are triggered by social pressure. Your near or dear ones become the benchmark for accumulation of material goods. That’s where budgeting problems start.
It’s likely that the financial position of your neighbour is better than that of yours. Don’t base your buying decisions based on such comparisons. It could ruin your finances and put you in a debt trap.
The best approach is to dispassionately classify purchases into two categories - needs and wants. Focus on the former and ignore the latter. For instance, a modern lifestyle might demand two cars for a family, but a single car might be the need of the hour.
3. Not working as a team
Be it in cricket or family life, team work makes a lot of difference. Many a time it has been seen that finances are managed separately by family members, especially where both the couples are working. In one family, I came across an arrangement whereby the husband took responsibility for entire family expenditure whereas his wife paid for her lifestyle expenses.
It is important to come together and share financial information. It will not only provide a big picture of family finances, but also help achieve future financial goals. Moreover, in case of unfortunate circumstances, surviving partner will be in a better position to manage family finances.
4. Too Frugal a Budget
Resort to a very frugal diet routine and inevitably you are likely to binge and throw all the hard work out of the window. So is it with frugal budgeting. A frugal budgeting which is too restrictive can actually demotivate you causing ‘frugal fatigue’. A spending binge can set you back far more than treating yourself occasionally.
Therefore, treat yourself sometimes and keep your spirits high. Occasional dine-outs and vacations are a must. Also, celebrate achievement of financial milestones by rewarding yourself. You could order a cake with five candles on finishing five years of successful SIP investing!
5. Under-providing for emergency fund
Often the unexpected throws family finances out of gear. An unforeseen medical expense or a big car repair job could dent your budget. So, provide for an emergency fund from your regular budget to take care of such unanticipated expenses. Ensure it is equivalent to four months’ salary of yours.
In short, good family budgeting is all about discipline, practice, and learning along the way. Moreover, it evolves as needs of the family, income, and priorities change. That’s when you need to do the necessary tweaking. Happy Budgeting.