In these serious economic times, what can you do to strengthen your family's financial position? Here are five crucial steps you can take to put your finances on a more sound footing.
These days, it's hard to find any good news about the economy. Stock markets around the world are unraveling. Home values have plummeted, and increasing numbers of families are struggling with mortgages they cannot afford.
Retirement accounts are shriveling. Grocery and utility bills are going through the roof. Businesses are failing, and new layoff announcements seem to come nearly every day. To say we're facing grim economic times would be a huge understatement.
"Many people are feeling totally helpless and stressed-out about what's happening in the economy. Even if they have a job now, there's a lot of anxiety about whether they'll still have one a few months down the road," observes Erica Sandberg, a San Francisco-based family money management consultant.
But while many feel blindsided by the economic downturn, it really was predictable, adds Michael Gutter, Ph.D., assistant professor of family financial management at the University of Florida. "As a society, we've been living way beyond our means and buying virtually everything on credit, including homes that are out of our price range," he says.
When the real estate market started its downward spiral a few years ago, many homeowners found themselves owing more on their homes than they were worth. They were in over their heads in debt and couldn't meet their mortgage payments, nor could they sell their homes. So they defaulted on their loans. This led to the failure of many banks, causing a chain reaction that continues to ripple through our economy.
Certainly there are no easy fixes to our world's financial problems. Any quick perusal of the daily news will attest to that. Still, families can—and should—take steps to maintain control of their own finances in these uncertain economic times. Doing so will not only decrease your stress levels, it is actually something God expects us to do.
God expects us to wisely manage what we have
In Luke 16:1-13, Jesus told the parable of the unjust steward to warn people against poor stewardship. This applies not only to what we do with our money, but also to everything else God has given us in this life.
Verse 11 sums up the parable by stating, "So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?" (New International Version). God wants to see how well we're going to manage our physical possessions now before He entrusts us with far greater assets in His Kingdom.
In Proverbs 27:23-24 we're admonished, "Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever" (NIV). We're also told, "The plans of the diligent lead surely to plenty, but those of everyone who is hasty, surely to poverty" (Proverbs 21:5).
Many other verses in the Bible similarly stress the importance of good financial planning.
Even though our lives are in God's hands, He wants us to do our part to keep our finances in check. This is always important, but especially when times get tough. "You may have been able to get away with a certain amount of careless spending in the past, but you can't anymore," Dr. Gutter warns.
So what can you do? With today's economy in mind, here are five ways to manage your family finances more effectively:
1. Prepare a budget
The number one step you can take is to create a budget for your household. Simply put, "a budget is a plan for how you are going to spend your money," says Karen Varcoe, Ph.D., a financial adviser and consumer economics specialist with the University of California Cooperative Extension.
Budgeting helps you see how you are actually using your money and where you need to make adjustments in your spending. Dr. Varcoe says leaving your finances to chance, as so many families do, is a sure path to getting deep into debt.
Creating a budget involves five basic steps. First, sit down as a family and set some short-term and long-term goals in terms of how you want to use your money and time. What's your top priority? Is it sending your children to college? Saving for retirement? Spending time with your family? Going on a vacation? Buying a second automobile? This will get you thinking about how your financial habits could impact those goals in the future.
Second, calculate your net household income for one month. Include your regular paycheck, as well as any bonuses or income from investments or side jobs that you regularly receive.
Third, track your expenditures for a month. Get a notebook and put a heading at the top of each page for different spending categories such as housing, food, transportation, entertainment, clothing, medical, payments on credit card debt and loans, and miscellaneous. Each time you write a check, use your credit card or buy something with cash, record that amount under the appropriate heading in your notebook.
Fourth, at the end of the month, total each spending category. Don't forget to factor in annual or semiannual expenses such as property taxes or insurance premiums. Calculate the cost per month of each such bill. You'll need to set that money aside to be able to pay these bills when they come due. This will help you see if too much or too little of your monthly income is going toward certain kinds of purchases. Then add up all your expenses for a grand total and compare that to your net income for the month.
This leads to the fifth and last step—to actually plan out your budget. Hopefully your expenditures for the month were lower than your income. Then your task is to prioritize this excess to areas of your budget such as savings or paying extra on outstanding credit card debt.
Look at your monthly expenditures to see if they were in line with your family's goals. If not, you will need to make appropriate adjustments in your budget.
"If one of your family's goals is to spend time together in the evenings and weekends, then you don't want to get yourselves so far in debt that you're barely making it each month," cautions Bill Gustafson, Ph.D., senior director of the Center for Financial Responsibility at Texas Technical University.
"If you do, either you or your spouse will probably have to increase your work hours or get a second job if times get tough, and that's going to take time away from your most important goal."
If your expenses exceeded your income, you'll have to cut expenses or increase your income to have a balanced budget. If finding additional income is not possible, you will need to decrease your expenses. Most of these cutbacks will have to come from variable expenses (utility bills, entertainment, transportation, clothing, groceries, entertainment, dining out, etc.) rather than fixed expenses (mortgage or rent payments, auto and educational loans, tithes, etc.).
Once you've come up with your budget, stick with it. When you do spend, record the expenditure either on a computer (using a budgeting program such as Quicken or Microsoft Money) or in a ledger book. Keep a running total of how much you've spent in your various budget categories for each month. If you get to the point where there's no more money left for the month in a particular category, stop spending. Don't let yourself spend what's not in the budget.
2. Live below your means
In normal economic times, the standard recommendation from financial advisers is to live within your means. However, in today's economy, "you'd be much better off if you could actually live below your means," Dr. Gustafson says.
Take a good look around your household and see what you can do to cut down on expenses. You can usually find many ways to save money—everything from shopping at consignment stores and clipping coupons to going out to restaurants less often and doing your own yardwork instead of hiring someone else to do it. Turn down the heat in winter and the air conditioner in summer to save on utilities. By reducing expenses, you will have more money to put in emergency savings or to pay down outstanding bills.
You can even get your children involved with this. Depending on their age, explain to them some of the serious issues in the economy and why it's especially important not to be wasteful right now. See if they can come up with their own ideas for saving money.
Barbara of Chicago says that by doing this, her kids have really become motivated to "get on board" with the family's goals of lowering spending. "They check the newspapers for coupons for me and look for sales, they don't leave the lights on in their bedrooms anymore, and they haven't asked for a new toy in months," she relates.
"Now they're planning what vegetables they want to plant in a garden this summer so we can spend less on groceries. They've really helped us trim down the family budget!"
3. Avoid buying on credit
This is not the time to purchase depreciable, non-essential items (such as new cars, clothing, furniture, appliances, boats, jewelry and other luxury items) on credit, or to borrow additional money.
"You don't want to be adding to your debt load, especially in a sluggish economy," advises Dr. Varcoe. The reality is, "a lot of people are feeling insecure about their jobs right now. If you're one of the casualties, you don't want to be unemployed and have a heavy debt load to deal with too."
Keep in mind Proverbs 22:7, which tells us, "The rich rule over the poor, and the borrower is servant to the lender" (NIV). Taking on a lot of debt is not wise—even when the economy is in good shape.
If you become burdened down with a heavy load of debt, it's as though you become a slave to your creditors. You cannot spend your paycheck on what you want because you owe huge amounts to the credit card companies, which are probably charging exorbitant interest rates.
Not only is it inadvisable to use credit cards for "wants," but you shouldn't rely on them for "needs" either, cautions money management consultant Sandberg. "Credit cards are not an emergency vehicle. The moment a family begins to say, 'Hmmm, money's a little tight this month; I think we're going to have to start charging,' that's the time to cut up all the credit cards. If you're short on cash, you need to find another way to get by other than credit cards."
She says credit cards should only be seen as a payment tool for short-term loans that are paid back when the monthly bill comes due so you aren't being charged interest. (To avoid interest charges you must have a zero balance each month, and your credit card company may have other restrictions. Read the fine print.)
4. Pay off existing debts
If you're already in debt, do whatever you can to pay off existing credit cards and other high-interest loans. Perhaps you've been able to reduce household expenses or even have a few garage sales. Use that extra cash toward debt reduction.
Hal Young, a financial adviser in Folsom, California, says the key is to eliminate enough monthly expenses to come up with a so-called "power payment." Pay whatever extra amount you can, in addition to your regular minimum payment on at least one outstanding debt. Even if you're only paying an extra $100 a month, that can really help bring down the credit card balance. He recommends making a chart, listing every creditor by interest rate, total amount owed and the minimum monthly payment.
"The bill with the highest interest rate or the smallest balance is probably the best one to attack," says Young. It's far easier to whittle down a $3,000 credit card payment than a $30,000 home-equity loan.
You may also want to get some professional help from a debt counselor. Most cities in the United States offer some type of consumer credit counseling services. There you will be able to obtain help for free or at very low cost. Debt counselors can help you consolidate your debts and put together a payoff plan for you. They may even contact your creditors and arrange to have some of your bills delayed for a while to help you get back on your feet financially.
5. Save at least 10 percent of your income
Financial planners generally suggest families put at least 10 percent of their paychecks into savings. With the world economy as shaky as it is, many financial advisers, like Dr. Gustafson, recommend families save closer to 15 percent of their income if at all possible. Allocate that amount into your monthly budget, just as you would your fixed living expenses.
The Bible also stresses the importance of saving. In a footnoted paraphrase of Proverbs 21:20 , The Ryrie Study Bible says, "The wise man plans and saves for the future, but the foolish person squanders what he has."
It's not easy, but by having money set aside in savings, you'll be better prepared if you have an unexpected expense (such as a major car or household repair), or if you find yourself having to buy a "big ticket" item (such as a new washing machine). You won't have to turn to your credit cards to get by.
"Even if you have debt, it's important to save some money," says Sandberg. "Debt is a very draining emotional experience. If you're simultaneously whittling that debt away, but at the same time you're also tucking money away for your family, it kind of counteracts that feeling of 'Ughhh, all I'm doing is paying off the damage of the past.' So emotionally it's just a really good thing to do."
You should have separate savings accounts set up for long-term goals (such as your retirement or college for your children) and short-term goals (to pay for things like vacations, new appliances or car down payments). Additionally, every family should have three to six months' worth of living expenses (mortgage or rent payments, utilities, food and transportation costs) set aside in an emergency fund—just in case you are laid off or incur a major unexpected expense.
The source of true peace of mind
We realize that many of our readers are hard working and that their income may be just enough to meet regular expenses. Realistically, you may not be able to apply all the principles in this article at this point in your life. If so, you're not alone—we've all been there.
However, you should still diligently examine your financial circumstances and the principles explained here and apply what you can. For example, you may not be able to save 10 to 15 percent of your income or put three to six months of living expenses in an emergency fund, but start where you can and save what you can. Make every dollar count.
But no matter what your family's financial situation, do not overly worry. True, these are indeed perilous economic times. There is a lot we could become anxious about if we let ourselves—but don't. Do what you can to try to get your financial house in order and to provide for yourself and your loved ones, and then leave the rest up to God.
Philippians 4:6 says, "Do not be anxious about anything" (NIV). Certainly that includes recessions, company layoffs and stock market crashes. Remind yourself that although God won't supply all of our wants, He "will meet all your needs" (verse 19, NIV). Ultimately, that is what is going to give you true security and peace of mind. GN