Learn to manage money. How to create a family budget?

Everyone probably wants to have their family finances in order. But sometimes it’s easier said than done. According to the mapaexekuci.cz portal, about 700,000 citizens of the Czech Republic are facing foreclosures, against whom almost 4.5 million foreclosures are pending. At the same time, about 108,000 debts are being discharged in accordance with the Insolvency Act. The mishandling of family budget was not always the beginning of the sad story, but having them under control is the best prevention against falling into a debt trap. Learn how to save and what to invest in. We will advise you how to do it.

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Why is money management important?

The basic principle of proper management of the family budget is that we cannot spend more money than we can earn in the long term. In short, family expenses cannot be systematically and constantly higher than family income. If we spend more than we earn, we necessarily have to borrow for the missing expenses. We incur debt, and if we behave this way repeatedly, the family debt usually grows.

To avoid misunderstandings, it is not always necessary to consider debt as a bad thing that should be avoided at all costs. But it always depends on why our debt arises. If, as a result, household “operating expenses” exceed 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 principal. The interest is a reward for the one who lent to us and reduced his 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 represents to the lender.

How to save.

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If the debt of the household increases, the share of interest and principal paid in the total expenses of the family increases, thus worsening its position when it wants another loan. And thus the amount of interest that we have to pay increases. It is a vicious circle. It is important to remember that interest and debt repayment is always the first expense that a given family has to cover, at the expense of other expenses. It was not for nothing that our ancestors said that debt eats from the bowl.

If the family is unable to meet its obligations, the creditors will start collecting their money. At first it’s good, at worst it can end up with a proposal for insolvency or a decision on execution. That is why a responsible approach to family finances is important, it will save you a lot of trouble.

Budget – what you can’t do without

However, in order to manage responsibly, we must have an overview of family finances. He will help us get the family budget drawn up. The basis is to find out the volume of all income that you can count on every month. And on the other hand, also regular monthly expenses.

The monthly income for most families will be the salary from their job. In addition, it can also be social transfers (such as child allowances, housing allowance or parental allowance, etc.). But also include other income in income, even if it does not have to be repeated every month. It is, for example, some form of extra income (perhaps a part-time job). To “normalize” them, divide them by the number of months in the year. This will give you an idea of how much you can count on every month even from irregular income.

On the expenditure side, your family budget is burdened by housing expenses. According to the Czech Statistical Office, in 2021 housing accounted for an average of less than 25 percent of the expenses of domestic families. As household income falls, the share of housing expenses increases, and conversely, the more a household earns, the lower the share of housing expenses.

Family budget.

The second most important item of expenditure in family budgets is food, which accounts for approximately 20 percent. So if we are looking for areas where we can save the most, it is housing and food. Both of these items make up almost half of all expenses of Czech households. But due to the jump in energy and food prices in the past year, it will be a little more.

Family budget.

How to calculate income and expenses?

Now that we have clarified which items are most likely to make up the key parts of our family income and expenses, let’s now find out what your reality is. Let’s start with the simpler one, income.

Currently, it is an absolute standard that money from employment or business activities goes to people’s bank accounts. Therefore, there is nothing easier than going through your monthly account statement and adding up the amounts on all incoming items.

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In order to avoid distortion resulting from the selection of a specific month when you received some extraordinary income or, on the contrary, some fell out, it seems more appropriate to take a statement for the entire calendar year with you. And then divide the found amount by twelve. This will give you a fairly reliable picture of your monthly income.

If you live in a joint household with another person (or persons) who receives a regular income, and if they also participate in financing the running of your household, include their income in the overview. Typically, therefore, calculate your and your spouse’s, partner’s, or partner’s income together.

Now jump into the more difficult task of charting your household expenses. It will help you here if you spend money in cashless form. That is, if you have set up regular payments by standing order (or direct debit authorization), and if you make your purchases using a payment card (or bank transfer). Today, internet or mobile banking applications are already able to distinguish which types of goods or services you spend on, depending on the type of transaction.

However, if you do not have this option, then all you have to do is pick up a pen and paper, open your bank accounts, save receipts for purchased goods and map all expenses manually. However, as already mentioned, roughly half of the expenses relate to housing and food.

Other important items are likely to include transport, leisure activities or the occasional purchase of clothes, shoes or taking a holiday. Don’t forget regular payments such as leases, insurance, loan repayments or payments for children’s clubs. For payments that are repeated once a quarter or once a year, do not forget to convert to individual months.

Family budget.

Budget – Are you in surplus or short of money?

The last step before starting to build a family budget (and getting a perfect overview of your balance) is to compare income and expenses. Therefore, it is of the utmost importance not to leave out any income, but also any expenses that you include in the balance sheet. Be really honest and sincere, especially with yourself, because this is the only way you can avoid any financial problem. If you overestimate some income (after all, I will definitely get an increase next year), or, on the contrary, underestimate expenses (this was just a one-time thing), you are only lying to yourself. You don’t want that.

And here it is, the hour of truth has arrived. Income minus expenses. How are you doing? Are you in the red? Congratulations, your financial situation is relatively good, but even then you should not give up on drawing up a family budget. Did you get a net zero? Fine, the same goes for you.

Do you find yourself missing some money every month? Perhaps what you have suspected for some time has just been confirmed. Don’t despair, nothing is lost and getting your family finances back on track is not impossible. The important thing is that you faced the truth and admitted the problem. Now comes the relatively easy part, i.e. finding a solution. But one that will be long term and give you back your financial stability.

Create a budget using these methods

The spending side is key to drawing up a family budget. First of all, you need to have an overview of what you spend or want to spend on. Once you are in the picture, you can compare your household’s financial demands with its financial possibilities.

As already mentioned, it makes sense to draw up a family budget even in a situation where you spend less than you earn. Although you are already creating some savings, by clarifying your income and expenses, you may be able to save even more.

Write down the items that you must spend every month under all circumstances. This includes mortgage or other loan repayments, insurance premiums, or rent if you do not live in your own house or apartment. Furthermore, advance payments for electricity, gas, heat or water. These items will probably be the most difficult for you to deal with, 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. Also, make a note of the day your paycheck landed in your bank account. This will give you an overview of the timing (mis)alignment of monetary income and expenses in a given month. A handy Excel table can serve you quite well for this, where you can see the balance of your income and expenses at any moment with appropriate sorting.

Family budget.

If you don’t want to sit down at the computer every day and do some kind of home accounting, you can also use one of the rather handy applications that you install on your smartphone. There are quite a few available for Android and iOS – Spendee, Wallet, Finkulačka, Patron GO, Fidoo and the like. Just take a picture of the receipt and the application will sort the expenses for you by type. Some can even identify overpriced goods, so they can advise you on what to look out for next time. Still others include options for financial planning based on your ability to create savings or on what loans you repay.

Not the cashless type? It doesn’t matter, you too can manage your finances responsibly. You must have already heard about the so-called envelope method. This consists in accurate planning of expenses. When you set aside items from your income that you have to pay regardless of the situation, you can work with the rest. As a rule, you will get the maximum amount you can spend per day until the next payday. And maybe you expect some other expenses that you can’t or don’t want to avoid – for example, you’re planning to buy a washing machine, TV or bicycle. In this case, divide the money into envelopes and describe each one according to what the money is intended for. For food, for children’s clubs, for clothes, or money without further specification.

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Either way, at the end of the month, sit down over your income and expenditure statement and go through each item. Try to think how necessary this or that purchase was and whether you acted too hastily. You should be able to rationally justify every expenditure. Here too, be as honest as possible with yourself and don’t panic if you find that you’ve been spending unnecessarily here and there. Remember that you learn from mistakes. And above all, that’s what we’re after – getting control over your finances.

Budget – summary and some final advice

Creating a family budget is a basic prerequisite for gaining control over family finances. This is a very important matter if you want to avoid potential financial problems, which in the worst case can result in insolvency proceedings or even execution.

The basis is to map 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 belong to the happier part of the population. However, if the balance comes out negative, it is time for a detailed “audit”, especially of your expenses.

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Don’t be shy to properly justify each expense item. Do not buy hastily, make a shopping list and do not deviate from it. If you go grocery shopping, eat first. If you’re shopping hungry, you’re more likely to put things in your cart that you don’t need as much and may end up throwing them in the trash.

What to invest in.

To monitor your expenses, you can use mobile banking (if your bank can sort expenses according to the types of goods and services purchased), one of the applications for monitoring expenses, Excel, but you can also use pen and paper. Be honest with yourself and don’t lie to yourself. In the end, you are the one who will benefit from the result.

This article is also available in Slovak and Czech.