The Cardinal Rule of Family Finance: The Budget

by Frugal Brian

A recent study of Americans’ “financial literacy” proved what bankers and credit card companies long ago surmised: the average American does not know how to balance his or her checkbook, and the average American family does not write-out and manage money according to a budget.  Not surprisingly, therefore, well over 80% of American families live one paycheck away from homelessness.

A follow-up study indicated, however, when families do set and follow strict budgets, forecasting and accounting for every penny, they gradually dig themselves out of debt and lay the foundations of genuine wealth.  The budget sets priorities for family members’ saving and spending, and it governs the family’s finances with the rock-solid authority of scripture.

Aggressive budgeting in a bigger financial strategy

You may have heard the time-worn financial planner’s adage, “Make yourself your first creditor.”  Although it has the quaint tone of a saying cross-stitched into a sampler, its wisdom thrives in a depressed economy.  Always put the first 10% of every paycheck into your savings or investments.  Then, living frugally and managing your money strategically, you and your family work toward four major goals:

  • First, you want to set aside at least $1000 in an “emergency fund,” clearly, firmly establishing and enforcing the rule that money does not come out of the emergency fund except in a genuine financial emergency.  The rule warrants repeating: the emergency fund contains money you will use only in the most extreme financial crisis—the car needs a transmission or major repair, or you must make a substantial co-payment on a major surgery.  The Nordstrom Twice-Yearly Sale is not a financial crisis, and Manolo Blahnik pumps will not correct the kink in your spine.  Keep the emergency fund in a traditional savings account, where it will earn a little bit of interest while it remains accessible.
  • Second, when you have built-up $1000 in your traditional savings account, go on to save at least six months’ pay in a certificate of deposit.  That savings account represents your “bail out” in the event of a serious family recession—extended unemployment or disability.  The money in the CD probably represents the difference between keeping and forfeiting your home.
  • Third, work aggressively to become debt-free, retiring your credit cards in interest-rate order from highest to lowest.  Your credit card statements now tell you how long it will take for you to retire the balance if you continue making only the minimum payments.  Most American families discover, to their chagrin, that they face more than fifteen years indebtedness on their Visa and MasterCards.  If, however, you pay the minimum plus 50% on “the big” credit card, you will retire it quickly while you hold your own against the others.  When “the big” credit card reaches zero, pay the minimum plus 50% on the next one in the sequence, and so on until all the balances reach zero.
  • Fourth, make extra mortgage payments.  Consult a financial planner and develop a strategy for retiring your home mortgage as quickly as possible.  Some families arrange weekly payment plans, or they arrange to make mortgage payments with every bi-weekly paycheck, cutting the terms of their home loans by half or more.

Setting an example, forming healthy habits

Setting, following, and strictly enforcing the family’s budget, you set a sterling example for your children, and you develop healthy habits for their own financial management.  Parents must instruct in and adhere to the rule “We do not spend money we do not have.”  Although your budget strategy almost inevitably will raise your credit score, giving you leverage on more credit at lower interest rates, you must believe and act as if credit cards and loans were not an option, because they represent “money you do not have.”  Parents also must refuse to relent in the face of “night-before-it’s-due” emergencies, teaching the children the nasty consequences of failing to plan their school expenses.  Most moms allow an “escape clause,” though, saying that a last-minute assignment is the teacher’s fault rather than the student’s, buying the poster boards and “Sharpies” as needed.

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