Everybody probably wants to keep their family finances in order. But sometimes it’s much easier said than done. According to the Mapaexekuci.cz portal, about 700,000 citizens of the Czech Republic are facing foreclosures, with nearly 4.5 million foreclosures pending against them. At the same time, there are about 108,000 insolvency proceedings under the Insolvency Act. It was not always the wrong handling of family budget that started the sad story, but having them under control is the best prevention against falling into a debt trap. Here’s how to do it and how to save money.
Why money management is important
A basic principle of good family budgeting is that you can’t spend more money than you can earn in the long term. In short, family spending cannot systematically and consistently be higher than family income. If we spend more than we earn, we necessarily have to borrow to cover the shortfall. We incur debt, and if we behave in this way repeatedly, the family debt usually increases.
Lest there be any misunderstanding, it is not always necessary to regard debt as a bad thing to be avoided at all costs. But it always depends on what our debt is incurred for. If, as a result, the household’s “operating expenses” exceed its income, it is clearly a path to financial ruin.
Debt means two things: the obligation to pay interest on the debt and the obligation to repay the debt itself, or the principal. The interest is a reward for those who have lent to us and have reduced their current consumption because of it. The amount of interest depends on the price of money on the market, but also on the risk that the borrower poses to the lender.
If a household’s debt burden increases, the share of interest and principal payments in the family’s total expenditure increases, thus worsening its position when it wants another loan. And so the amount of interest we have to pay rises. It is a vicious circle. It is important to remember that interest and debt repayments are always the first expense that a family has to pay, at the expense of other expenses. It is not for nothing that our ancestors said that debts eat out of the bowl.
If a family is unable to meet its obligations, the creditors start to collect their money. Initially in a good way, at worst it can end in a bankruptcy petition or a foreclosure order. This is why a responsible approach to family finances is important, it will save you a lot of trouble.
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Budget – what you can’t do without
However, in order to manage responsibly, we need to keep track of our family finances. This will help us to get a family budget. The key is to find out the amount of all the income you can count on each month. And, in contrast, also the regular monthly expenses.
The monthly income for most families will be the salary from their job. In addition, there may also be social transfers (for example, child benefit, housing benefit or parental allowance, etc.). However, include other income as well, even though it may not be recurrent each month. For example, some form of earnings (such as part-time work). To ‘regularise’ it, divide it by the number of months in the year. This will give you an idea of how much you can count on each month, even from irregular income.
On the expenditure side, housing costs are the biggest burden on your family budget. According to the Czech Statistical Office, housing will account for less than 25 per cent of domestic families’ spending in 2021. As household income falls, the share of housing expenditure rises, and conversely, the more a household earns, the lower the share of housing expenditure.
The second most important The second largest item of expenditure in family budgets is food, at around 20 per cent. So if we are looking for areas where we can save the most, it is housing and food. Both of these items account for almost half of all Czech household expenditure. But given the jump in energy and food prices over the past year, it will be a bit more.
Budget – how to calculate income and expenses?
Now that we’ve established which items are most likely to make up the key parts of our family income and expenses, let’s find out what your reality is. Let’s start with the easy one, income.
Nowadays, it’s absolutely standard for money from a job or business to go into people’s bank accounts. Therefore, there is nothing easier than going through your monthly bank statement and adding up the amounts on all incoming items.
In order to avoid the distortion resulting from picking just a particular month when some extra income came in or, on the other hand, some dropped out, it seems preferable to take a statement for the whole calendar year. And then divide the amount by 12. This will give you a fairly reliable picture of your monthly income.
If you live in a household with another person (or persons) who receives a regular income, and if they also contribute to the running of your household, include their income in the statement. So typically count your income and that of your spouse, partner or partner together.
Now, let’s tackle the more difficult task of mapping your household expenses. Here it helps if you spend money in a non-cash way. That is, if you have set up regular payments by standing order (or direct debit authorisation), and if you make your purchases by credit card (or bank transfer). Online or mobile banking apps can now distinguish which types of goods or services you are spending on based on the type of transaction.
But if you don’t have this option, then you have no choice but to take a pencil and paper, open your bank accounts, keep receipts for the goods you buy and map all your expenses manually. However, as already mentioned, about half of the expenses are related to housing and food.
Other significant items seem to include transportation, leisure activities or occasional purchases of clothing, shoes or vacation purchases. Don’t forget regular payments such as leases, insurance, loan repayments or payments for children’s clubs. For payments that recur quarterly or annually, be sure to do a monthly recalculation.
Budget – are you in surplus or are you short of money?
The last step before starting to build a family budget (and getting a perfect picture of your balance sheet) is to compare your income and expenses. That’s why it’s of utmost importance not to leave out any income, but also not to leave out any expenses that you include in your balancing. Really be honest and honest with yourself first and foremost, because that’s the only way you can avoid any financial problems. If you overestimate any income (after all, I’ll definitely get a raise next year) or underestimate any expenses (this was just a one-time thing), you are lying to yourself and yourself alone. You don’t want that.
Here it is, the hour of truth. Income minus expenses. How are you doing? Are you in the black? Congratulations, your financial situation is pretty good, but even so, you shouldn’t resign yourself to making a family budget. Did you come up with a net zero? Fine, the same applies to you.
Do you find that you’re missing some money every month? Maybe you just confirmed what you’ve suspected for a while. Don’t despair, nothing is lost and getting your family finances back on track is not impossible. The important thing is that you have faced the truth and admitted the problem. Now comes the relatively easier part, finding a solution. But one that will be long-term and return you to financial stability.
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Create a budget using these methods
The expense side of a family budget is key to making it work. First, you need to have an idea of what you are spending or want to spend on. Once you are in the picture, you can compare your household’s financial requirements with its financial capabilities.
That being said, it makes sense to make a family budget even if you spend less than you earn. While you may already be building up some savings, by making your income and expenses more manageable, you may be able to save even more.
Write down the items you need to spend on each month at all times. This includes mortgage or other loan payments, insurance premiums, and possibly rent if you don’t live in your house or apartment. Also, advance payments for electricity, gas, heat or water. These items are probably the most difficult to move, but you need to know how much you actually have to write off each month.
Next, continue to write down every other expense you make day by day. In addition to this, make a note of the day your paycheck landed in your bank account. This will give you an overview of the timing of your cash receipts and expenses in a given month. A handy excel spreadsheet can serve you quite well for this purpose, where you can see the balance of your income and expenses at any given moment with appropriate resampling.
If you don’t feel like sitting down at the computer every day and doing some sort of home bookkeeping, you can also use one of the rather handy apps that you can install on your smartphone. There are quite a few available for Android and iOS – Spendee, Wallet, Finkulačka, Patron GO, Fidoo and so on. Just take a picture of your receipt and the app will sort your expenses by type. Some can even identify overpriced items, so they’ll tell you what to look out for next time. Others include options for financial planning based on your ability to save or what loans you’re paying off.
Not the cashless type? No problem, you can manage your finances responsibly too. I’m sure you’ve heard of the so-called envelope method. This involves planning your expenses precisely. If you set aside items from your income that you have to pay for no matter what, you can work with the rest. Usually, you will work out the maximum you can spend in a day until your next paycheck. And maybe you’re expecting some other expenses alongside that that you can’t or won’t avoid – for example, you’re planning to buy a washing machine, a TV or a bicycle. If that’s the case, divide the money into envelopes and describe each envelope according to what it’s for. For food, for kids’ clubs, for clothes, or money without a specific destination.
Either way, at the end of the month, sit down over your income and expense list and go through each item. Try to think about how necessary this or that purchase was and whether you were too hasty in making it. You should be able to justify each expense rationally. Again, be as honest as possible and do not panic if you find that you have spent unnecessarily here and there. Remember that you learn by making mistakes. And that’s what we’re all about – getting control of your finances.
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Summary and some advice in conclusion
Creating a family budget is essential to getting control of your family finances. It is absolutely essential if you want to avoid potential financial problems which, in the worst case, could result in insolvency proceedings or even foreclosure.
The key is to map out your regular monthly income and expenses and then compare them with each other. If you find that your income is higher than your expenses, you are among the happier part of the population. However, if the balance comes out negative, it’s time for a detailed “audit”, especially of your spending side.
Don’t be shy about justifying each expenditure item properly. Don’t buy rashly, make a shopping list and don’t deviate from it. If you go grocery shopping, eat first. If you shop hungry, you are more likely to put things in your cart that you don’t need as much and may end up throwing them in the trash.
You can use mobile banking to track your spending (if your bank is the one that can sort your spending by the types of goods and services you buy), one of the expense tracking apps, excel, but a pencil and paper will do. Be honest with yourself and don’t lie to yourself. In the end, you are the one who will benefit from the result.
The article is also available in Czech and Slovak.