Managing your money as a family

Wouldn’t it be great to win the lottery or inherit a fortune and suddenly have enough money to pay off all your debts and enjoy being rich for the rest of your life! If we are realistic, it is not likely to happen.

And even if the dream came true, you would probably find that having a lot of money does not end financial concerns. Even millionaires need to know how to manage money.

Money management skills and good practices are needed no matter how much or how little one has. Financial planning is important. While it’s hard to think about planning for the future when pay day is a week away and your wallet and checkbook are empty, you can learn to manage dollars carefully.

What’s important to you?

Why do you spend your money the way you do? If ten people were given a $100 bill, they would most likely spend it in entirely different ways. Why? Because different people value different things. The deep-rooted beliefs you have about what is desirable and good are known as values. Values grow from personal experiences. You make choices based on your values. Values are not necessarily right or wrong; they express what is important to you.

Families set goals based on their values. A major reason why many couples argue about money involves differing values and conflicting goals between partners.

Don’t clash over cash

When asked how much money is enough, a wealthy individual replied, “Just a little bit more.”

Most families find there is never enough money so, sooner or later, they squabble about how to spend the limited dollars. Meshing different styles of handling money doesn’t just happen because people love each other. It takes effective communication, time, and effort.

If your money discussions escalate to shouting matches or tearful sessions, changes are needed. Realise each of you will have different attitudes and values. To one, money may represent power. To another, it may mean security or status. One may be a spender, another a saver. The concern is not that you always agree about money, but how you disagree and that you come to a suitable compromise.

— What is an argument worth? Save arguments for important issues and major expenditures. Decide amounts each person can spend without reporting to anyone. It might be $5, $10, $25 — whatever fits your budget. These regular allowances provide a sense of spending freedom and eliminate discussions over personal items and incidentals.

— A time and a Place. Talking about money “later” or promising to discuss it “some other time” may never happen. Schedule regular meetings to discuss financial matters. This keeps you and your co-spender informed and can prevent minor concerns from becoming major problems.

The particular time you decide to meet will depend on family schedules. Try to avoid meeting between 5 and 7 pm when people are usually tired and hungry. Meeting just before payday or when bills are due is often a good choice.

For your meeting, choose a place with minimum distractions. Do not let the television, radio, and phone interfere with your communications.

Include all family members when appropriate. Children can learn from this process. Allow everyone a chance to express feelings, wants, and needs without interruption or criticism. Family members are more likely to support a decision if they are included in the decision.

— Listening habits. Effective communication requires good listening. What kind of listener are you? During a disagreement, do you find yourself planning your defence? Does your mind wander? Do you stop listening if a subject is hard to understand?

Listen for key points. Ask questions if you don’t understand something. Be careful not to criticise, argue, or give feedback that keeps someone from expressing feelings.

Solving money problems

If a problem is worth arguing about, it is worth solving. Combine good communication skills with the following steps:

— Acknowledge that there is a problem. Get feelings out in the open.

— Identify the real problem. Money issues are often emotionally charged. Organised, written records give objective information rather than guesses. Be sure the issue is really money.

— Discuss only the identified problem. Keep personalities, past complaints, or other problems out of it.

— Brainstorm alternatives. List all possible actions/solutions no matter how ridiculous. No one should comment on suggestions until the list is complete.

— Discuss each alternative and agree on a possible solution. Write it down. A compromise may be the best solution. Everyone should feel their wishes were considered.

— Make every effort to support the solution. Identify and avoid obstacles. Recognise necessary sacrifices. Perfect solutions are rare.

— Keep communications open while working out the solution. Each person needs to feel understood, appreciated, and loved.

What do you want to do with your money?

To manage money, it is necessary to take a look into the future, see where you want to be, so you can plan how to get there. Families set their financial goals based on their values. One family’s goal list will be different from another family. For example, family goals can include owning their own home, paying off all debts, higher education for the children, taking a family vacation, or setting up an emergency fund.

• Think about your goals. Financial goals are the specific things you want to do with your money within a certain period of time. Goals give you purpose for the way you will spend your money today and tomorrow. Goals give targets for different periods in the future.

— Short-term goals can be done soon. Perhaps in a week, or a few months, but no longer than a year. Examples: Buy new clothes, save for a vacation.

— Intermediate Term Goals can be accomplished in one to five years. Examples: Buy a new car, pay off debts.

— Long-term goals look ahead five to ten years and longer. Examples: Buy a house, put children through college, retire.

To increase your success, follow these principles:

— Set realistic goals. Ones that are set too high may frustrate you and cause you to give up your plans. Maybe it is impossible to save $100 a month right now, try for $25. If a new car is beyond your means, would a used model meet your needs?

— Be specific. State your objectives in detail. If goals are vague, they may never be achieved, and others in your family may have different ideas of what the goals really are. An example is: “If we save $100 a month for the next 12 months, we would have $1,200 for the emergency fund.”

— Be flexible. Plans may require adjustments as your income and life cycle change. Don’t be so rigid that you have to start over with an entirely new plan. For example: An unexpected expense comes up. You can’t save the entire $100 this month. Don’t let that get you off track. Continue to set aside something towards your goal, no matter how little it might be.

More thoughts on goals

You and your family probably have some ideas about the things you want in the future. An advantage of setting goals is that you have something to work towards. People can get so caught up in day-to-day problems they end up accomplishing very little towards intermediate and long term goals. A lack of financial planning can mean problems sometime in the future.

A goal may require resources other than money to achieve. Your resources include: time, talents, and abilities. In order to achieve some goals you may decide you need to earn more money; and in order to do that you may need more training or education which requires time and talents, as well as expense.

Setting your family goals

How many goals will you list? It just depends on your family’s needs, wants, and desires.

Take time to write down your goals so you can see what is really important to you and your family and what you want for your future. One example of an important goal in all households is the emergency fund.

A specific amount should be set aside each month. It is important to identify the obstacles and involve the entire household in the commitment to the goal.

Obstacles to overcome:

other demands for current expenses other goals and priorities current spending habits limited amount of money coming in each month an emergency fund has not been a priority before defining what is an emergency.

In order to further contribute to your emergency fund, you can:

Save all loose change for the emergency fund.

Use coupons and put savings into emergency fund.

Pack lunch at least twice each week and put savings in fund.

Put half of all cash gifts received into fund.

Take time to seriously think about and discuss what you want for the future. On a separate paper list the goals important to you and your family.

Listing goals is usually not hard. The more difficult task is to rank your goals. Identify your highest priority goal and label it “1.” Place a 2 on the second highest and continue until you rank each goal on your list.

Easy and Creative Ways to Invest for the Future

Many people think that buying stocks or having investments requires a lot of money. In reality, investing for the future can be done if on the budget of someone who is living paycheck to paycheck. The key is knowing where and how to accomplish the task

For most people, even saving a little money out of each paycheck is very difficult. Between the bills that have to be paid each month, and the special little surprises which arise, most people just aren’t able to save any money.

In addition, for those who are living paycheck to paycheck, it seems that only those individuals that already have money are the only people that can really afford the methods that are necessary to save. It is hard to invest in stocks when you need a minimum of $2,500 to even open a trading account. Even worse, let’s forget trying to open a long‑term annuity when you need $10,000 just to talk to a broker.

The reality, however, is that a lot of people save for the future without having a lot of initial capital to invest. The trick to building a savings for the future is twofold: having a plan that you can afford to stick with, and knowing the ways that you can save with only a few dollars.

By following the techniques outlined in this article, you can have a savings for the future. Just remember: savings is not built overnight. You will not get rich overnight, either.

Easy and Creative Ways to Invest for the Future

Savings Bonds
When most people think of savings bonds, they may think of something that was received for winning the school spelling bee, or a gift given by a grandmother to start that proverbial college fund.

In reality, savings bonds can actually be great ways to invest. Especially if you are a person who has trouble putting money away without finding reasons to spend it, savings bonds may be just the answer.

Savings bonds can be purchased in amounts as small as $25. And instead of having to go the bank to buy savings bonds, they can now be purchased online. When you purchase the bond, it accrues interest twice a year. The beauty comes in the fact that a savings bond cannot be cashed in for its accrued value until after 12 months from the original purchase date. This means that the money invested cannot be touched for at least a year.

Now, in reality, the interest that savings bonds accrue is not that high. However, when you consider that you can invest $50 a month, or $600 a year, draw interest on it, do this for the next several years, and not be able to easily touch it, you will find yourself with a pretty good amount of money later on.

A Savings Plan
Now, you can have all the knowledge in the world about investing, but if you don’t have a plan for actually saving money, then no amount of information is going to help.

The first step to actually making savings a normal part of your life is to treat it as a monthly expense. Just as you do with your car payment, mortgage, or even cable bill, plan your savings as a bill. And just as you should with an expense, make it an expense that you can afford.

Secondly, make your savings plan something you are proud of. While so many people might see this as common sense, it is not! Most people buy a car because they are proud of its appearance, or a home because of its location. Well, putting money aside in stocks, savings bonds, or even just a savings account should be viewed as creating assets—assets for the future.

The Investor's Secret Weapon

You may have sourced hundreds of articles, lessons, resources, and tutorials and learned about financial statement analysis, discounted cash flows, accounting conventions, basic tax strategies, real estate, mutual funds, stocks, bonds, and more. All this knowledge is pointless, however, without the one key trait that has the power to save you from immense financial and psychological pain. That silver bullet is summed up in a single word: rationality.

What is rationality?

For the purpose of this article, we’ll define it as “the ability to make intelligent decisions based upon objective observation of your own psychology, the facts surrounding a particular investment, and the specifics of your financial situation”. It can mean the difference between retiring to your vacation home in Palm Beach and spending your days working multiple low‑paying jobs into your golden years. Perhaps more importantly, it can mean the difference between a peaceful night’s sleep and agonizing hours of tossing and turning as a result of worrying about your pocketbook.

Rationality Key 1: Know Thyself (Understand Your Own Psychology)

In each and every life decision there are ordinarily two distinctive choices: the one that makes the most sense in terms of financial or physical well‑being, and the one that lets you sleep at night.

Imagine, for example, that you have $500K in a diversified portfolio. Your banker approaches you and offers to loan you $300K in a long‑term, fixed rate personal loan with semi‑annual payments that you estimate can easily be made based upon your expected rate of return. This additional leverage will magnify your return on equity, causing you to generate far more profit for each dollar of your own you have invested. Should you take the deal?

From a practical standpoint, it makes sense to accept the terms of the agreement and borrow the funds. Your investments are conservative, you are not moved by market fluctuations, and you don’t have any need for the capital already in your account. Over the next twenty years, the incremental return that is generated by the borrowed money will result in many times the wealth you would otherwise have owned.
On the other hand, your personality may simply lean toward a desire to be debt‑free.

Regardless of the additional profit you could earn by utilizing the bank’s resources, you are already financially independent and have no desire to introduce any repayment risk whatsoever. You are going to sleep easier knowing that everything you possess is legally yours with no claims against it. If the Stock Exchange closes for years due some horrific accident or natural disaster, you won’t be affected because there is no need to make payments or sell assets.

Which course of action would rationality seem to dictate? If an objective observation of your own personality reveals that you are likely to fret about owing money – regardless of it is makes good financial sense to do so – it is probably unintelligent for you to take the cash. In other words, as odd as it seems, one of the most rational things you can do is accept your irrationalities that are unlikely to change and compensate for them accordingly.

Rationality Key 2: Remember that Money is a Means, not an End unto Itself

Money exists solely to serve a purpose. All of the effort you put into selecting stocks and bonds is simply so you can have a better life for yourself and your family. There are other factors at work that supercede the time value of money. There is nothing wrong with a 25‑year‑old spending $400 on a dress as long as she is fully aware that the decision not to invest cost her approximately $37,220 by the time she retires. Is a single item of luxury apparel worth such a hefty price tag? Only she can decide – but rationality dictates that the decision must be done with eyes wide open and even then, only if the decision won’t be second‑guessed and regretted.

Rationality Key 3: Be Realistic

The ability to confront cold, hard reality is perhaps one of the most valuable traits an investor can possess. Figure out what you want, what you need to do to get there, and then develop a system that will take you to your goal. A case in point: A very close friend of mine is in her mid‑sixties. She has consistently made poor financial decisions yet lamented that she is unable to own a home, even now. What’s worse, she resents those who are financially well off, despite the fact that many of those people worked their entire lives to save, invest, and build a nest egg.

As far as we know, there are no known cases of manna raining down from heaven in recent centuries. Isaac Newton’s observation of cause and effect is just as real in the world of investing as it is in physics. If you don’t do what is necessary to achieve your goals, you will never have the things you desire. It is that simple. The good news is, you can change course regardless of age or circumstance.

Rationality Key 4: Don’t Be Moved By Emotion

As you were reminded in Stick to the Basics: Simple Reminders for Profitable Investing, movements in the quoted price of your investments are meaningless except in that they allow you to add to your holdings at attractive, lower valuations and sell your holdings at rich, higher valuations. As Graham said in The Intelligent Investor, to allow yourself to become perplexed by these movements is to become emotionally tormented by mistakes in other peoples’ judgment!

Once you and a financial advisor have put together a structured portfolio that reflects your time frame, resources, and investment goals, why should it matter if your holdings decline twenty‑five percent in a year? As long as your approach is sound and you avoid overpaying for securities, these occurrences can be valuable opportunities to add to your existing assets on the cheap.

Rationality Key 5: Bolster Your Knowledge with Authoritative Sources

It’s much easier to remain impartial and unemotional when you are convinced you are correct and the market is wrong. Such self confidence can only be acquired by studying the basics of finance; check out Top 10 Investing Books for some recommended reads.

Conclusion

Financial decisions should be impartial, cold, and rational. Whether you are deciding between paying off debt and investing, or analysing an income statement, optimism and “irrational exuberance” should not be allowed to affect your decision making abilities. Think critically, logically, and do what makes the most sense for your bottom line within the confines of your personal psychology.