Financial threats can visit families in many different forms.
A health crisis, student loans or a broken transmission can all lead to unexpected debt.
While the average family share of credit card debt is $15,325, NerdWallet notes American consumers owe $11.16 trillion to creditors.
Mention a formal budgeting process to families, and you’ll most likely get an eye roll that would make any teenager proud.
When even seasoned economists can’t agree on where the economy is going, how is the average family expected to know what is best for their economic futures?
When unexpected debt knocks on your door, are you prepared? Many people cannot answer that simple question, and when the unexpected comes, they get in financial trouble. If you don’t know what you have, where it is, how to access it, or what your needs are, you are about to slip up.
Here are four strategies to help your family batten down the hatches in good and bad times:
1. Know what you spend
Knowing what your expenses are is the golden rule of making ends meet. You can’t fund what you don’t know exists. One doesn’t mail a letter without using a postage machine to access the cost. You must not only know what your expenses are, you must anticipate what other expenses you may have. Financial planners encourage you to:
- Understand the difference between a need and a want.
- Write down your expenses. There are free online programs that allow you to load data into a budget spreadsheet.
- If you want professional help, understand the difference between a financial planner and someone who wants to sell you a product.
Expenses can be easily divided into three simple categories:
- Essential expenses — These are expenses that sustain your family life. Only these four categories should be included: housing, transportation, utilities, and groceries.
- Your future — If your child builds a Lego tower with one block at the bottom and increasingly heavy blocks at the top, you might praise his creativity. But, ultimately you know his tower will fall down. Likewise, you must prioritize your financial blocks, and lay a good foundation.
- Lifestyle choices — The third category is touchy, because that’s where we include our Bahamian vacation or the morning skinny Venti mocha. These are the extras, those things we should not purchase until we have funded our needs and saved for our future. Some financial advisers believe no money should be spent at all in this category until essential expenses and savings/investments are funded each month.
Yes, that is harder to swallow than the double espresso at 6 a.m.
2. Find a budget system that works
The “Journal of Financial Services Professionals” cited a 2013 Princeton University study that shows only 40 percent of respondents follow a monthly budget. More than a fifth of the total respondents didn’t keep track of any expenses.
There are alternatives for those who don’t want to track expenses in a formal worksheet. For example, routine and non-routine expenses can be tracked separately or paid from different accounts. Here are some other useful tips:
- Make a written budget, and stick to it.
- Your success in developing a written financial plan depends on your ability to work the plan.
- Pay fixed expenses like insurance on a steady basis to weather the ups and downs.
- Save Big on Luxury – Rolex Replica
3. When it’s gone, it’s gone
Don’t use credit cards if you cannot afford to pay them off.
In reality, it is a very difficult thing to do. It’s very easy to run up a huge credit card balance with an interest rate so usurious that it might ultimately make you cry.
4. Rainy days don’t always need to get you down
You don’t need a crystal ball to understand you need a rainy day fund to keep your family financially steady. To start you rainy day fund, anticipate how much you will need to live on for 3-6 months. This may seem like a stretch when there are car payments and daycare and food to pay for, but make it happen. Even a few dollars a week can keep you from going bankrupt if you lose your job.
Still don’t feel comfortable creating and implementing your own plan? Check with your employer, professional organization or union for free financial planning support and advice. While you can’t avoid many of life’s unexpected pitfalls, you can recognize they will come, and prepare as best you can.
What tips do you have for managing family debt? Share them in the comments.