One of the biggest challenges families face today is simply making ends meet. Living within your means, not pay check to pay check but actively saving and budgeting what you spend, has become a habit that many families have not learned. Going into debt to "Keep up with the Jones's" can mean the difference between living a healthy life style and struggling daily to pay mortgages, fill gas tanks in the family car and put food on the table. Add a family member with a chronic illness or disability to the situation and the family budget is the first area to feel the pinch. It's all a matter of priorities.
Many families without sufficient money management skills will find themselves in bankruptcy court very quickly when faced with large medical bills if they don't take control of their own financial well being. Budgeting, frugal spending, bill paying, tracking spending, communication, are all skills family members must have in order to take care of their loved one and still meet their financial obligations.
The following is a list of ideas to consider as you develop your family financial plan toward greater financial stability:
1. Credit is not thought of as debt.
More than two-thirds of all families use some type of credit card, and less than 50% of them pay off their account balance each billing period. Don’t think of your credit card limit as a line of credit, but think of lines of credit as lines of debt.
2. Borrowing to make payments to creditors.
What would you do if you were on a boat in the ocean? The boat has ten holes in the bottom and you have only nine corks. No matter how you move the corks around, your boat will eventually sink. Determine affordable payment amounts before you acquire a debt to avoid finding yourself borrowing from Peter to pay Paul.
3. Limit to 20% of your take-home pay for all credit payments.
Installment debt (including car payments and credit cards) should not exceed 20% of what you take home after taxes. Car payments alone sometimes meet or exceed this limit, but for some reason are often thought of separately from other consumer debt items, such as furniture, household appliances, and clothes. Include everything but the mortgage when you total up your credit payments, and keep these to no more than 20% of your take-home pay.
4. Second incomes should go to pay debts.
The net amount realized from a second available income may vary based on job expenses, taxes, social security, etc. It may be less than you think or would hope but should go toward debt elimination, not toward increasing debt based on the presumption of higher income.
5. Common sense credit card use.
When using credit cards, be sure the item purchased lasts longer than the payments do. When you charge dinner rather than pay cash, you are basically telling the bank you want a loan to pay for it. Use credit cards only for preplanned purchases of durable goods, or for emergencies. Make out a shopping list and stick to it, don’t carry credit cards or checkbooks with you, and let some time pass before making major purchases to better assess real needs versus wants.
6. Pay accounts on time.
Cash flow problems can occur. Not many things cause more stress than getting behind on bills. To avoid this, create a special account for such contingencies or subtract credit card purchases just as you would checks.
7. Pay more than the minimum each month.
Many credit card repayment plans are set up so you pay only1/36 of the principal due plus interest. The bank doesn’t want you to pay your full balance too fast, they don’t make as much profit. To avoid paying higher interest dollars, accelerate your pay off schedules adding as much extra to the principal as possible to each payment.
8. Make your debt repayment schedules no longer than one year.
Excluding home mortgages, the ideal duration of a loan should not exceed one year. This should apply to student loans, credit cards and even to car loans as well. However, with the higher cost of a new car, it may be unrealistic to expect to pay off a car in one year.
9. Distinguishing between needs and wants
A great skill to living within your budget is the ability to distinguish between needs and wants. A need is something required for survival, a means to go on living, accomplishing, or contributing. A want is something providing greater convenience, enrichment, or pleasure. Everyone continuously distinguishes between needs and wants. Perhaps the most important step in creating a successful financial plan is to determine just how little is needed to satisfy the basic necessities.
10. Prepare a Budget
Only about 50% of American families use some kind of budget; about 12% have one written down. A budget is a systematic plan for meeting expenses during a given period, a road map directing how to get where you want to go financially. Your overall goal should be to spend your money on things you value, things that will last. A realistic, well thought-out financial management plan is the most important factor in achieving the level of financial stability you want from your resources.
(Based on a BYU Broadcasting Living Essentials Program entitled “Debt Management”. Printed with permission)
* For more family management resources and information Linda recommends the following web site:
** A printable copy of the above information is available as a newsletter printed July 2005 "Family Finance Management"