It is a fairly natural wish in every household to have a future brighter than how things are at the moment. You need to plant the seed of a better vision early on in life to see it mature and realize its full potential. To make that happen, one needs three things.
- A target that is well-defined as opposed to being vague (aim to have a second car and family home instead of just aiming for a ‘brighter future’).
- Management skills for money in at least one member to carry out family finance planning so savings can be done, sound investments made and expectations managed. Alternatively, financial planners can be hired and consulted for professional grade advice and
- Dedication and commitment of all the concerned members to ensure the least resistance and most motivation of all stakeholders.
This is easier said than done, of course. Planning for a single individual requires so much deliberation and control, imagine doing it for a whole bunch of people! However, there is a method to the madness so read on as we explore how to do financial planning for your household and achieve your vision for the future.
Important Life Milestones & Goals
When it comes to life, there’s a lot that doesn’t seem to go as planned. However, there are certain milestones that are pretty likely to occur. If there are children in the family unit, there is going to be a need for a college fund.
A house of one’s own is a nice solid target. Retirement savings, marriage, vacations, and even old-age health care funds are all common goals that most families wish they had thought of when they were still young and able.
The one principle guiding your hand when determining goals is that they should be SMART i.e., Specific, Measurable, Achievable, Relevant, and Time-bound. Take house ownership for example. Ideally, it would be best if you had thought out the time frame for completing mortgage payments, how much you can afford with your current income and investments, and what exactly you can compromise on to have that dream fulfilled.
Spending and Lifestyle Choices
Once the target is set, certain information will have to be collected to bring to light the full picture of the state of affairs in the house is operating in currently. Simply put, all forms of expenditure and liabilities will need to be carefully examined and listed. You may find yourself or others within the household paying for memberships that aren’t even used or spending frivolously where it could easily be avoided.
This definitely does not mean relegating yourself to a lesser lifestyle than what you are used to. Financial planning is not just for the future after all. It is for your family’s present as well. But listing out all expenses and debts may help you and your partner realize where adjustments could be made.
It will also help you for the next step where you practice budgeting as you will be able to list recurring and one-off expenses like taxes, major upkeep, or family trips you may have planned.
Well-Planned Budget
At this point, you’ve gained a good map of where you are coming from and what you will be working towards. But that’s all groundwork for the actionable steps you need to take to get there.
A huge chunk of family finance planning is making the budget and investing the money saved. It is the framework of how your spending ought to look like and also a commitment of fiscal resources to the priorities you’ve determined before.
Drafting a budget is simple if you’ve tracked all your expenses thoroughly. There are apps that allow you to fine-tune your expense tracking and even help you prepare the budget. But with a little insight, you can make it yourself and take more ownership of the process.
A budget encompasses a year generally and the first one is always the hardest. But then as it becomes routine, it gets easier with your predictions being more and more accurate.
It contains not just the outflows of your family but the inflows and savings also. So, if you’ve flagged the need for emergency or vacation funds, these will be part of the budget as well.
Debts and Liabilities
Sometimes it is inevitable that you run into a bit of debt. But that is no reason not to be smart about it. In fact, if done properly, it can even boost your credit rating quite rewardingly.
Being debt-savvy means carefully considering your liabilities and the rates of return attached to each and restructuring them so that those with a higher rate of interest are cleared promptly with a solid plan to work off the remaining debt as soon as possible.
The general rule is that credit card debt should be cleared post haste while student loans, which have low-interest rates and lenient terms (in some places they may even be written off completely if the borrower is unable to pay within a certain number of years) should be considered after.
Even when planning to take on debt, carefully consider all options well in advance of actual need so that you can get the best offer and limit your burden to the bare minimum amount. After all, a little planning can go a long way.
Savings
The urge to save money seems the most logical thing when it comes to family finance planning and meeting future goals. But trust us on this. It is a recipe for making your life, and the life of those around you, quite miserable.
So, resist the urge and do the smarter thing by clearly and practically defining what you are saving for and how much you can put aside for that objective.
A college fund would be ways into the future if your kids are still young. Instead, build up a health or emergency fund before anything else so that you do not go broke when things go unexpectedly south.
Funds like these should be invested in accounts from which they can be quickly withdrawn. These often offer lower rates than their longer-term counterparts but the aim is to earn a passive return on the amount saved while still having the advantage of liquid cash at your fingertips.
Insuring against Risks
In order to circumvent some risks in life, it is better to have insurance in place. Things like cars and homes have obvious benefits that can be easily calculated. But health and life insurance should be carefully evaluated so that you get maximum coverage against the premium you pay.
While it is prudent that both partners have insurance so the kids can be well taken care of in case the worst comes to worst. Having even a single partner insured can protect the family during times of great distress and lows.
Investing According to Risk Appetite
The second key aspect of family finance planning after budgeting is investing. As a rule of thumb, the higher the return the higher the risk. But not everyone can stomach highly risky investments.
They simply do not have the mindset for it and the amount of stress such a decision puts them through is not worth any reward it may be capable of bringing.
Households with a few dependents and a strong support system are usually the type to go for the risker investment opportunities. On top of that, if one of the parents is fluent in economics and finance markets then the task is made all that much easier for them.
The one thing for certain is that you can be financially independent when your money works for you even when you aren’t.
Few tips when financial planning for your family:
- Monitoring
As your plans are set into motion, your work is far from over. At regular intervals, check how you’re doing and measure that progress against the budget. Reason out variations and incorporate any changes to the action plan immediately. Apps do make the mundane tracking work quite easy and it’s worth a shot as there are many free popular ones on the web to choose from.
- Team effort
Get the whole family on board with as much of the plan as possible. Discuss with your kids their marriage and education plans and frankly communicate your expectations of their contributions to the plans.
Your partner and dependents should be able to understand that their efforts are vital to the success of the plan and what they can achieve from that success.
- Celebrating
Not all the fruit of your labor has to be reaped in some distant future. Saving for a family vacation can be a bonding experience for the whole household and rewards everyone’s contribution to the roadmap set out. Small victories will help to build toward the bigger targets set out.
Nothing worth having is ever easy. It is the same way with family finance planning. It requires many hours of brainstorming and mulling over numbers and action plans but when you see your dreams materializing in front of your eyes and your loved ones well-cared for and happy (and well-educated in the art of financial responsibility hopefully!) the effort pales in comparison.
