Tuesday, December 31, 2019

New year, new budget - how to make your household finances really work

Don’t let 2020 be a repeat of 2019. But you said that last year, didn’t you?

Every January we rue the purchases of December, but now is the time to focus on making 2020 the year you finally break free of the hold your finances have over you.

 

THE PROBLEM

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A couple who may run a business or department in work, who are fantastic at managing budgets, purchases and accounts can find it all seems to fall apart at home.

A 2012 longitudinal study in the United States found that couples were more likely to split up when money was the main source of friction compared with other problems. Science Journal ‘PLOS One’ revealed it was the perceived unfairness in pooling finances that had a more damaging effect on marital harmony than arguments over sex, housework or child-rearing.

It can lead, at worst, to what researchers call ‘financial infidelity’. She hides the receipt for the new pair of shoes; he has a secret bank account she doesn’t know about. She rips open the credit card bill when it arrives; he hides it in a drawer until creditors call.

People are marrying later in life and by your mid-30s financial habits are already well entrenched, so merging finances and assuming it will all work out is rarely the case.

“Issues with money are common,” says clinical psychotherapist Stephanie Regan. “Often it is simply that one is much more conscious of money and the imperative of saving and the other is a little more impulsive and inclined to spend once the money is there.

“It’s often indicative of a different approach to life, or it may be something that has been passed down in the parental system and the messages that have been received from home.

“If spending has become debt, the matter is not only a difference between each other in terms of style or approach, but an issue of being irresponsible with money, which has an impact on both parties. The factor then is one of financial infidelity, with the same potential to break a relationship as one person feels disrespected as the other has taken risks with their mutual bond.”

 

THE SOLUTION

“First you must recognise and acknowledge that you have a different approach and where that different approach emanates from,” says Ms Regan.

“Like all the issues in relationships it is not about who is right and who is wrong, but rather about accommodating both sets of needs.”

Practically speaking, there are ways to approach this. If the money runs out before the month on a regular basis, you have a budgeting problem. If your money disappears servicing loans, you have a debt problem.

 

BUDGETS

The worst way to budget is to take your cue from the Minister for Finance. He’s a smart man, but if households only sat down on one day in the year to decide all the spending, they’d soon run adrift. Budgets are organic; monthly or even weekly tracking is far more valuable.

To find out your outgoings, calculate your spend by period: weekly (groceries, train, petrol, parking, lunches), monthly (anything on direct debit, mortgage and so on), and, where it really gets sticky, irregulars (medical/dentistry, hairdressing, vet bills, car repairs, summer holidays, back to school, and, yes, Christmas). Because these ‘appear’ suddenly (although we all know they’ll arrive), we tend not to budget in advance, and that’s the trick.

Make a list of all irregular spending you can think of – calendarise if it helps – and then add it up, divide by 12, and that’s the amount you need to budget every month in a special account for household bills.

If you do this, I promise, it will revolutionise your financial life.

 

DEBTS

Not all debt is bad. We couldn’t buy a house without a loan, but when you borrow for day-to-day spending, it becomes a problem. Alarm bells include putting your groceries on credit card, contactless tapping on credit, treating your debit and credit card as interchangeable and buying new when you don’t need to.

List your debts in order, low to high. Pay off one as soon as you can and move the payments saved to the next one in line. This creates a ‘snowball’ effect. Your mortgage is at the end – if you can free up all the other debt payments, you can choose to overpay your home loan or start saving properly.

 

TECH HELP

Budgeting apps are great. N26, Revolut, AIB and KBC are the best for this.

N26 says: “Automatic spending categorisation sorts purchases into broad categories such as ‘food and groceries’ or ‘shopping’, presented as a simple pie chart”. You can change the name, add a hashtag and make it individual to you.

A study of people using the personal finance app Money Dashboard found that where people used the budgeting function, they significantly reduced their spending. Just seeing your spending pattern creates a psychological barrier to tipping into debt.

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