Family Finance For Beginners

What is Family Finance?

Family Finance is a term that covers the management of your family’s money and time. It includes banking, budgeting, estate planning, insurance, investing, mortgages, tax planning, and time management. Say that 5 times fast!

Explanation of Family Finance

When you think about it, Family Finance can be intertwined with almost all of your actions and decisions in your everyday life. It revolves around your goals and coming up with plans to fulfill those needs. Your goals and desires can be limitless, but as Paula Pant says “You can afford anything, but not everything“. Most of the time, your needs may revolve around your income, expenses, and living requirements. In order for you to make the most out of your and your family’s life, you’ll need to become familiar with common financial terms and be able to decipher between good and bad advice.

12 Key Strategies To Manage Family Finance

Like the inspiring wisdom found in this old Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” It’s never too late to start securing your family’s financial future. Below are some of the best strategies to get started:

1. Learn basic financial terms for Family Finance

INCOME

• Gross Income is the total payment you receive before any taxes, expenses, or deductions.
• Net Income is the total payment you receive after any taxes, expenses, or deductions.
  • Taxes are the fees that you pay to the government.
  • Expenses would be items such as union dues or possibly child support.
  • Deductions would be retirement benefits, health care costs, or special funds and donations.

ASSET

• An asset is any resource that has economic value.
  •  Assets could be things such as cash, cash equivalents, property or land, and personal property.

LIABILITY

• A liability is any resources you owe to another person or entity.
  •  Most family liabilities will include mortgages, auto loans, student loans, credit card balances, personal loans, and payday loans.

INTEREST

• Interest is money paid for money lent. It can be something you pay or receive.
  • An example of interest you pay would be the charge for borrowing money for a loan.
  • An example of interest received is money paid from the bank to you for deposits inside your checking/savings account or a CD (certificate of deposit).
• Compounding interest is interest accrued from interest.

CHECKING AND SAVINGS ACCOUNT

• A checking account is an account at a bank that allows for deposits and withdrawals. This account is for your payroll deposits, bill paying, and day-to-day cash transactions.
• A savings account also allows for deposits and withdrawals, but there are limitations on how many withdrawals you may make before incurring fees. A savings account should have a higher interest rate than a checking account and is best for long term savings.

NET WORTH

• Net worth is the value of your assets minus liabilities. This number can be positive or negative.

BUDGET

• A budget is an estimate of income and expenditures over a set period of time. For a family, this time period is typically monthly or annually.

401k and IRA

• A 401k is a retirement account that is company-sponsored that allows employees to save and invest for their own retirement on a tax-deferred basis.
• An IRA is an Individual Retirement Account. IRAs are owned by the individual. These accounts allow for tax-deferred retirement savings and investments.

AMORTIZATION

• Amortization is paying off of debt in regular payments over a period of time.

APR and APY

• APR is the Annual Percentage Rate. This does not take into account any fees or compounding interest.
• APY is the Annual Percentage Yield. This takes into account the intra-day and intra-year interest and can have important implications for borrowers.

CAPITAL GAIN

• A capital gain is a profit that results from the sale of an asset. Two examples where you may deal with capital gains is the sale of your home or the sale of stocks.

CREDIT REPORT

• A credit report contains a summary of a person’s credit history. It will show historical information such as lines of credit, loans, late payments, bankruptcies, and recent inquiries.
• Individuals can obtain a free credit report annually from each three bureaus at AnnualCreditReport.com

CREDIT SCORE

• A credit score is a measure of an individual’s financial activities inside their credit report. A credit score is the number is used to grade an individual’s ability to repay a loan.

Here’s a book if you’re interested in learning more terms or possibly consider it as a gift for a high school or college student!

2. Determine your net worth

As defined above, your net worth is total assets minus total liabilities. Knowing this number will help you gauge where your family is financially. Don’t be discouraged if this number is negative when you begin. Remember that what gets measured, get improved! Many times it can be difficult to find all of this information in one place, but there’s free software available to help!

Sign up for a Personal Capital for tracking your net worth. The reason why we chose Personal Capital is the ability to see everything in real-time. Personal Capital allows you to link your accounts all in one place. This includes your checking, savings, investment, credit cards, and even your mortgage. For any accounts that you cannot link, it allows for the creation of a “paper” account or an account in which you track the total manually.

3. Start A Budget

If a budget is an estimate of your income and expenditures over a set period of time, then the act of budgeting is estimating those totals. When you first begin to set up a budget, think of it as riding a bike on training wheels. The first step is actually riding that bike!

In your daily spending, there are different categories.  Categories can be fixed expenses like your mortgage, insurance, or car payment and variable expenses such as fuel, groceries, and toiletries. You do not need to know exactly what you spend in a certain category, but it’s best to take a guess and then measure at the end of the month to see how close you were.

YNAB (You Need A Budget) is the software that Tabitha and I love to use for our budgeting. We love it because it has both a desktop and mobile application that’s updated in real-time. Like Personal Capital, it also allows you to link your accounts and have your transactions automatically imported. It allows us to define an unlimited amount of categories and warns us when we’ve gone over. It’s simple to transfer from another category or increase your budgeted amount.

4. Control Credit Card Spending

Controlling how you spend on a credit card is very important to your family’s financial health. Credit cards can both be a tool or a determent to your family finances. If used wisely, you can use them to gain rewards on your everyday spending. if used poorly, they can enter you into a world of crippling debt.

Did you know that credit cards can be treated almost like a debit card? You can make your regular purchases and then pay that credit card off weekly instead of waiting for the monthly statement. It’s important to keep track of your total credit card debt.

If you find yourself as an impulsive spender, then maybe it’s best you stick to a debit card. Some tips that have helped us save money in the past are removing our saved cards from online websites such as Amazon. Having to enter your credit card for a purchase is just one more hurdle to get through before making a purchase and may prevent you from buying something you may not need.

5. Know Your Credit Score And Begin To Limit Debt

Knowing your credit score helps you know your chances of being approved for a loan or line of credit. If you know your score is low, then you’ll know to wait before applying for credit.  This can prevent an inquiry that may lower your score further.

The best way to learn your score is by signing up for a service such as Credit Karma, Discover, or even Chase. Each of these services are completely free. Credit Karma is the one we find ourselves using the most.

After starting your budget and learning your credit score, it’s important to limit your debts. Try to avoid frivolous credit card spending, and be intentional about large purchases such as a vehicle. Most of the time there are alternatives to help lower new debt such as saving to buy with cash or purchasing a used item instead of brand new. Used vs new can be extremely relative to a specific purchase, but it’s important to be educated about your purchase and do what’s right for your family.

6. Family Finance Planning

When it comes to Family Finance Planning, we feel there are three main topics: Insurance, Having a Will, and Passwords.

When it comes to Insurance, there are many many different types: health, dental, life, disability, pet, homeowner, rental, car, flood, travel, etc. Knowing the insurance your family has and is spending on that insurance is important to your family’s long term financial health. Assuming you have the basics (health, home, vehicle), we recommend also having a term life insurance plan for both you and your spouse.

As for Having A Will, what would happen to all of your family assets should something devastating happen? Who is responsible to care for your children? A will is the first step to ensure your plan and goals for your family is properly implemented should there be a loss.

In this day of technology, Passwords are so important! If something happened to you, does anyone else have access to your online accounts? Do NOT use the same password for every website! Generating strong passwords that are hard to guess will help secure your accounts from potential hacks or leaks. We recommend using a password manager such as LastPass or KeePass to keep all of your accounts and passwords properly protected in one place. Be sure to store the master password in a secure location such as your will or a safe.

7. Run Your Family Finance Like A Business

The first step in running your family finances like a business is to stay focused on what keeps money flowing in. Being able to prioritize this while looking at finances is key to keeping a profitable business.

The next step is assessing your key skills and not spreading yourself too thin. Spreading yourself too thin on items that may not line up with your priorities will potentially cause losses. Be aware of the potential benefits or costs associated with any new venture.

Utilizing restraint is the final step to ensure you run a successful business. It happens often, that people somehow manage to spend more money per year than they made. In order to gain net worth, you need to be cognizant of your family’s income and not to outpace it over time.

8. Pay Off Your Debts

Now that you’ve created a budget and know your net worth, its time to focus on paying off your debts. Paying off your debts will improve your family’s financial health and ensure a prosperous future. There are two main methods to pay off your debts.

First, you have the option to tackle debt using the avalanche method. The debt avalanche is a process in which you make minimum payments across all of your debts, and then apply anything extra to the debt with the highest interest. Mathematically speaking, this is the best way to tackle your debt.

Second, the other way to tackle debt is via the snowball method. The debt snowball is a process in which you make minimum payments across all of your debts, and then apply anything extra to the smallest debt first. This method feels the best emotionally, because you will slowly have less and less minimum payments to worry about.

9. Save For Retirement

When retirement age hits, it is generally understood that people will need at least 80% of their current salary during retirement. In order to have this level of income during retirement, you need to begin saving as soon as possible. The younger you begin, the better off you will be because of compound interest!

Now, after mentioning above that you should pay off your debts, there’s one thing you should NEVER forgo and that’s an employer match. If your employer offers a match for a 401(k), 403(b), or another equivalent plan, take advantage of that match! If you don’t, you are leaving FREE money on the table!

For those with higher interest debts such as 6% or higher, it is a general recommendation to continue paying off those debts prior to investing. This is not true in all cases, so you should consult with a professional before making this decision. For those with lower interest debts or no debt, you should be saving until it hurts. Save enough money that you find yourself having to spend less at times and you’ll find yourself and your family will be financially healthy for the long term.

The best way to begin saving for retirement is by utilizing your employer 401(k) plan or opening your own IRA and investing by transferring monies directly from your checking account after payday.

What broker you use, doesn’t matter as much as what you invest in. We’re fans of Robinhood, Vanguard, Fidelity, and Charles Schwab.

If you’re not sure what to invest in, we recommend reading The Simple Path to Wealth, by J L Collins. We’re fans of setting it and forgetting it for investing and only needing to check our plans annually.

10. Optimize Your Taxes

If you receive a refund every year, this means that you are giving the government an interest-free loan. It is best to avoid this and get as close to net-zero that you can.

In order to do this, make sure that you have an updated W4 form filed with your employer. The W4 form can be found directly on IRS.gov. If you or your spouse have a change in employment status, it’s best for both of you to fill one out for each of your employers.

Remember that taxes are marginal. This means once your income level reaches a higher tax bracket, not all of your income is taxed at that higher rate. When someone tells you that overtime is taxed at a higher rate, do NOT believe them!

Also, be sure to contribute to your tax-advantaged retirement plans such as a 401(k), IRA, 403(b), or 457(b). Each of these accounts allow for your money to go in tax-free and receive no tax penalties until withdrawal. Contributing to these accounts counts as a deduction to your taxable income and therefore lowers the amount of taxes you owe.

11. Be Mindful

One of our favorite books is Your Money or Your Life, by Vicki Robin. Vicki also talks about your relationship with money and how your time is traded for money inside of the book.

Be mindful of your time. Time is a resource that you cannot get back and time is finite. It’s important to prioritize spending time with your family and also knowing what you are spending in relation to your time.

It’s also just as important to treat yourself and your family for their hard work. Be sure to save for your vacations and use up your vacation time! Utilize your time away from work to do the things that you enjoy.

12. Stay Disciplined

None of this matters if you don’t follow your plan! Similar to a diet, you’ll always be learning and trying new things. Remember to enjoy life, but stay disciplined in a way that you keep control of your family finances.

Avoid lifestyle inflation as best as you can. Remember it’s important to reward yourself, but it’s also more important to be saving for your family’s future. Don’t allow yourself to deviate from your plans and spend frivolously.

Family Finance Summary

It’s important to stay emotionally detached when planning Family Finance. There is no one on size fits all, and what fits your family now may not in the future. Mastering your Family Finance is a major step in being financially literate. Be adaptive, but also be sure to plan for changes and growth along the way.

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