Wednesday, February 17, 2010

Preparing a Family Budget

4 Steps to Prepare a Family Budget

1.  Create a list of all your monthly income (what you earn).

This part is pretty simple. You can base on your payslip, or if you have extra income, make a record everytime you receive payment.

2.  Create a list of what you plan to spend (targeted expenses) and a list of all your actual monthly expenses (what you spend). If your expenses are not incurred monthly, prorate them on a monthly basis.

Make a list of all the basic monthly expenses (eg. mortgage/rent, food. grocery, transportation allowance, education, etc) and also possible extra expense items (eg. miscellaneous, grooming, leisure, etc).

Once you have started accummulating records of your expenditure, you can see which items take up the most chunk of your income. You will also be able to identify if you are spending too much on unneccessary stuff ("wants").

Here are some questions to answer to determine whether it is a "want" or a "need":

"What is my reason for spending on this item? Do I really need it?"

"How would things be different if I didn't have it? What would happen if I did not have it?"

"Do I need to spend more if I had it? Are there cheaper alternatives?"

Based on your answers to the questions above and the records you will gather from your monthly expense list, you can change your spending habits accordingly and make a better monthly budget. Remember "needs" are the priorities not "wants".

3. Set aside a fixed amount of savings every month. As a guide, you should have savings equivalent to 6 months of your salary as emergency funds at any point in time.

In our case, we try to save as much as we can. Target savings is around 40-50% of income, if possible. Although of course, there are months when we spend more than usual (eg. birthday, travels, christmas,etc). For extra purchases, we sometimes take part of our savings from previous months, or from bonuses. But we always had to bear in mind our target savings at the end of the year.

In some finance books, savings should be equal to 6 months worth of your expenditures. Work out what is better for you. The more you save, the better.

4. Develop a budget and follow it in a disciplined manner.

Having an expense and savings budget is not the end of the story. It should be followed as strictly as we can. There are times when we need to incur some unplanned expenses. This should not be a cause of panic. The reason why we try so save (#3) is so we can have extra money for emergency. That's why I believe that it is a good practice to always have some amount of savings every month no matter how small it is. These will accummulate and before you know it, you already have 6 months worth of salary in your emergency fund account!

From the family budget you've made, you can identify you net cash flow.


The target is to have a positive net cash flow. This means that you are spending just within your means (income). If you have a negative cash flow, it means you are overspending.

Keep track of your targeted and actual expenses as this will help you identify in which areas you are overspending.

Source:  brochure from MoneySENSE (A National Financial Programme for Singapore)

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