Fix your family finances

8th August 2008

Some new research from Abbey found that savers have withdrawn around £6 billion from their Individual Savings Accounts (ISAs) to meet the rising costs of living during the past twelve months. That means an average cash withdrawal of £579 each, all to stay afloat financially.

But fixing your family finances is possible by following some simple and well established financial planning steps.

Here are ten important steps we frequently recommend to our clients to help them take control of their family financial planning. Read through the following steps and establish which are likely to be most effective for your own family:

1. Make a budget and stick to it

At a basic level, a budget is simply a plan recording money coming in and money going out. Most families tend to run their budget on a monthly basis, to coincide with a monthly salary. Money coming in to the household is often fixed but expenditure has a nasty habit of increasing.

Without a budget that is both written down and regularly reviewed, it is very difficult to stay in control of your expenditure. Managing the amount you spend becomes easier with a formal budget.

Any budget that you create needs to be realistic and, if possible, leave some breathing space for unexpected items of expenditure. A budget with little or no breathing space will create frustration if you regularly find yourself exceeding your spending limits.

2. Invest for your children

You should make long-term investment for your children an important part of your family financial plans. When your children grow up and leave school you could be faced with some shocking costs to cover. A typical three year stint at University now costs in excess of £30,000. That is a huge amount of money to find if you have not planned ahead or, alternatively, a very large debt for your child to take on as they start their career.

Other likely expenses your child could incur include a first car, a deposit for a property or even the cost of starting a business. Nothing comes cheap in this life, but with some forward planning it is possible to spread these costs over a longer period of time and benefit from investment returns to reduce the total amount of funding required.

For children born on or after 1st September 2002 you can invest up to £1,200 a year into the tax-efficient environment of a Child Trust Fund on their behalf. They don't get access to this pot of money until they reach 18 but it remains in their name and they can control how the money is invested from age 16.

3. Clear unsecured debt

The cost of servicing unsecured debt is a drag on your ability to meet your other financial objectives. There is no escaping the fact that credit cards, store cards, personal loans and overdrafts are extremely expensive. If you have these forms of unsecured debt then your absolute financial priority must be getting rid of them.

The more you can afford to repay, the less money you will be wasting in interest charges each month. That means more money can go towards repaying this and other debt faster, as well as going towards meeting your financial objectives.

Before you repay unsecured debt it is important to stop yourself from accumulating more of it in the future. This means living within your means and developing a strong savings habit within your family. When credit was cheap and easy to obtain, the temptation to buy goods or services today (rather than save for a while until you could actually afford them) was strong. Now that credit is harder to come by and more expensive to service, the decision between spending and saving should be easier to make.

4. Build an emergency fund

Your emergency fund is a pot of cash that is readily accessible in the event of a dire financial emergency. It is the money which prevents you and your family from getting into severe financial difficulty as a result of an unexpected item of expenditure. What constitutes a dire financial emergency is for you to decide. In fact, you should decide this and write it down before the temptation of dipping into your emergency fund becomes too great to resist.

Most financial planners recommend that you create an emergency fund equivalent in size to between three and six months worth of typical expenditure. That means if your family spends £2,500 a month you need to hold somewhere between £7,500 and £15,000 in cash as your financial safety-net.

Of course this can seem like a insurmountable challenge on day one. Nobody is suggesting that you should create this emergency fund overnight. In fact, to do so for most families would require a lot of financial hardship and sacrifice. Take your time to create your emergency fund but make it an important financial objective and have a plan in place to get there, over time.

There is also an argument to suggest that you should not be building an emergency fund whilst you still have unsecured debt to repay. The interest you receive on cash savings will rarely, if ever, exceed the cost of servicing debt. The golden rule of financial planning is to pay off debt first and then start saving or investing your money.

5. Review your expenditure

If when working out your budget you discover you are spending more than you earn (something that we still find with new clients on a worryingly frequent basis) then you need to closely examine every single item of your expenditure. This is also a good discipline to follow if you are well within your budget, as the potential for cost savings can soon add up.

A good place to start is reviewing your list of direct debits. If you use internet banking then this is easy. Take a close look at each one, remind yourself where the money is going and find out if you can save money on that item. You might even find some listed where you can cancel the direct debit altogether. There are some advantages to paying for things by direct debit but this is spending money on auto-pilot. Unless you make a conscious effort to revisit these items on a regular basis, they can continue on for months or even years unnecessarily.

6. Consider making lifestyle changes

If you need to make radical cuts to your expenditure, then simply reviewing where you spend money with the aim of cutting costs might not be sufficient. In order to make significant cost savings you might need to undertake a comprehensive review of your lifestyle.

If you have a two car family, consider getting rid of one and sharing a single vehicle. This requires better journey planning, but the cost savings each year can be substantial. Do you really need to live in such a big house or have those expensive health club memberships?

Getting into financial difficulty is a common prompt for taking action of this magnitude. However, it is not the only reason for re-evaluating how and why you spend your money. It is possible to radically reduce the stress in your life by cutting back on your levels of committed expenditure. This leaves more money left over to save and put towards achieving your financial goals.

7. Get organised

There is no excuse for being disorganised when it comes to your finances. Money comes in and money goes out. At a basic level it is really that simple. What you need to be able to ensure is that you understand what money you are earning and what money you are spending. By understanding this, you will be in far greater control of your family finances.

The easiest way to get organised is to invest in a set of ring-binders and create various sections for different items, such as pay-slips, gas bills, bank statements, etc. You can then keep your financial paperwork neatly filed away in an easy to access format.

This does not necessarily mean spending time filing your paperwork every evening. Instead have a pending tray for your financial paperwork and make a note in your diary to organise it once a week or at the end of every month.

8. Plan your shopping

If you want to spend less, then it pays to plan ahead. Rather than buying things on impulse you can make big cost savings by working out what you actually need to buy (rather than what you want to buy).

To combat rising food prices it makes sense to plan a menu and then shop for the items you need. Build some flexibility into your planning for food shopping to take advantages of special offers available when you get to the supermarket.

A good way to remove the temptation from shopping is to do your weekly food shopping online. This prevents you from being physically present in the shop where they have invested millions into understanding the psychology of shopping; all in an attempt to encourage you to spend more money in their store.

9. Get the children involved

A good way to educate children about the value of money is to involve them with your family financial planning. Clearly you need to decide to what degree to involve your children, but even from a young age it is important that they understand there is a limited supply of money and decisions need to be made about how to allocate this money each week.

10. Make a plan

If you earn and spend money without a plan, then you fail to take real control over your family finances. A family financial plan does not need to be a complex document. Many families now choose to engage with a professional Financial Planner to help them build and then review their Financial Plan.

Within your Financial Plan document you should include a brief summary of where you are now (in terms of assets, liabilities, income and expenditure), where you want to be financially and how you plan to get there. It is important to consider every aspect of your family Financial Planning, including things like financial protection, debt repayment, paying for school fees and retirement planning.

At the end of your Financial Plan you should have an action plan which contains specific action points and the people who will be responsible for making sure these things happen. You can then place a note in your diary to review the plan on a regular basis - at least once a year, but more frequently if you have complex or multiple action points to complex.

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