Though you may not think of it as such, your home is much like a business. However, business finances tend to be highly organized, while household income and outgo can be a jumble of missed payments and late fees.
Organizing your home to function like a business can equip you to track expenses more carefully, use household income where it’s most needed, and maybe even set aside a little each month to build up cash reserves to prepare for the unexpected.
Organize personal finances. A business has revenue and operational expenses. So does a household. Household revenue comes from income earned through work, investments, government programs like Social Security, and other sources like income from businesses or rentals. The first step in organizing the family finances is to determine just how much revenue the household generates each month after taxes and other deductions. This is the household’s net income – the money you have available to spend each month.
Determine Your Fixed and Variable Expenses. Next, go over your bank account and credit card bills to review the money you’ve spent over the last few months. Then, create two lists of household financial expenditures.
The first list includes fixed, monthly expenses. These expenses are for the things you need, and might include:
- Mortgage or rental payment;
- Insurance costs (auto, home, renter’s, life, health, etc.);
- Transportation, including the monthly car payment, cost of gasoline, mass transit commuter pass, automobile maintenance, and other expenses associated with getting from here to there;
- Utilities, including electricity, heating, cable, water and other fixed expenses;
- Food expenses, though not necessarily fixed to the penny, are generally the same from month to month, give or take a special goodie from the supermarket;
- If you have other fixed expenses, like childcare costs or the cost of monthly medications, add these to the list of fixed expenses – expenses that must be paid each month.
Next, create a list of variable expenses – the cost of things you want. These expenses change from month to month based on how much discretionary income your household generates. Variable expenses might include:
- Vacations and trips;
- Dining out and fast food;
- Electronics and other “toys;”
- New clothes and shoes;
- Movies and other entertainment;
- Personal savings;
- Babysitting costs, and other costs associated with discretionary activities.
In the end, you’ll have two lists – one for non-discretionary, or fixed, expenses (“needs”), and one for discretionary spending, spending that can be adjusted from month to month to fit the household budget (“wants”).
“Big Picture” Money Management at Home
In the business world, “big picture” money management is a key function of company executives, who develop budgets, implement cost-cutting processes, and track cash flow. Just as in business, household “managers” are needed to track spending needs and better utilize income. Household managers, often the parents, are in the best position to oversee the broader, more long-range financial activities in the home.
These household money managers can:
- Develop a workable household budget;
- Plan for future expenses, like the purchase of a new car;
- Develop a long-term savings program for distant expenses like college tuition, a bigger home, and other major household expenditures that may occur in the future;
- Explain the household spending strategy to all family members and secure support for the plan from each member of the household;
- Update spending strategy as family circumstances change;
- Develop a plan to protect members of the household and household assets with a variety of insurance coverages;
Specific Activities of Home “Money Managers”
In addition to “big picture” money management activities listed above, there are also the small, but critical, details that help keep the household running smoothly.
These activities include:
- Maintaining household financial records and ensuring records are accurate and up-to-date;
- Making bill payments in a timely manner;
- Tracking household spending throughout the month;
- Identifying upcoming household expenses and reporting on unexpected expenses like repairs;
- Identifying opportunities to cut expenses, e.g., reviewing cell phone plans to see if the same services can be purchased for less, looking for sales on necessary items;
- Balancing the household checkbook each month.
The objectives of running your household like a business are: to improve management of income and expenses, to adapt quickly to unexpected expenses, to save for the future, and to ensure that all household members understand their individual responsibilities for maintaining the household budget.
Now may be the right time to call a family meeting about organizing your household finances, to help ensure that your household is run just as efficiently as your business.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.
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