Monday, January 20, 2014

5 myths of household budget management

There is no doubt about it. Managing a budget for your household can seem like a massive task, particularly if it has been done in a disorganised or haphazard way for the past few years. Unfortunately, many people end up overcomplicating a job which does not have to be difficult, by buying into the following five myths. Just avoid falling into these traps, and budget management doesn't need to be a major chore.

Record Keeping Is Difficult
It can seem as if budget management is incredibly complex, particularly if you are staring at a massive pile of invoices and bills which have not been organised. However, with the advent of cheap and easily available IT programmes to assist you, record keeping is easier than ever. All you need to do is to institute a simple system, and make sure that everyone in the house sticks to it. Buy a few folders for physical records such as receipts, and make sure that every major expense and expenditure is recorded on a spreadsheet or budgeting programme such as Quicken.

One Person Should Take Charge
This myth might seem more like an obvious statement of fact. Of course, one person should have oversight of the budget as a whole, and should commit themselves to ensuring that it is kept up to date. However, if only one person is responsible for every budget management task, the job can soon seem overwhelming. If you make sure that you 'recruit' the other members of your family, and ensure that filing away receipts and making entries of their financial activities becomes second nature, your management job will suddenly become much easier. Work with your family, not against them.

Credit Is Always Bad
As with so many topics in personal finance, the principle of avoiding bad debt has been overextended and fashioned into a myth. Not all credit is bad. For a start, many family financial structures will be based on a major piece of credit in the shape of a mortgage. As the only feasible way for many people to afford a significant asset such as a family home, a mortgage is both unavoidable and often an entirely justifiable way to avoid paying rent with no long-term benefit. More widely, however, small loans and payments through credit cards can help to establish and maintain a good credit score, which is vital if a loan must be secured for an unexpected expense in the future. Avoid taking out credit which you cannot easily repay, but keep at least one line of credit going at any time in order to strengthen your credit score.

Utility Bills Are Unavoidably High
In this time of recession, utility bills can make up an increasing percentage of any household's expenses. Fortunately, with the advent of the internet consumers don't simply have to accept high utility bills. Whilst only a low percentage of customers switch their accounts each year, it is in fact extraordinarily easy to do.  As an example, electricity prices can be vastly different between providers and can help to transform a household budget from deficit into surplus. Of course, price is not the only consideration to take into account. If you are concerned about your impact on the environment, using the internet is a good way to find the most environmentally friendly deal.

Expenditure Should Go Up With Income
Of all the myths surrounding household budgets, this is perhaps the most dangerous. In the spirit of "keeping up with the Joneses", many families simply assume that when their household income goes up, their expenditures should rise to match the increase. Nothing could be further from the practice of good budget management. A rise in income, particularly in the current economic climate, is never guaranteed to be permanent. Rather than channelling the new money into luxuries, make sure that a significant percentage of it goes to paying off existing debts and starting a savings account for that inevitable rainy day. Just because other people are using their bonus to pay for a new car doesn't mean you have to! You're sure to appreciate having some money left in the bank when you really need it.

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