How to manage your family income effectively?

Among the various material resources available in the family, money is the main resource, which is required to be managed to achieve the family goals of healthy, wealthy and happy family life. Money management is one of the important activities of home management. In order to achieve the family goals it is essential to learn to manage the money, which is prerequisite to all household activities. Money management enables the family members to know, understand and spend the money earned and also to plan saving for the future. Money management thus, includes the basic concept of understanding the family income, sources of family income, need for supplementing family income, importance of keeping household accounts and finally the need for savings and types of various savings for future.

What is family income?

The family income includes all the goods and services from various sources such as salaries of the members of the family, income from land or other immovable property owned by the family. Scholarships, gifts, etc. are also included in the total income of the family. Even money saved by the use of home-grown vegetables and other agricultural products will form part of the income of the family. Services such as rent-free houses, free servants, free transport, free medical facilities etc. are also included in the total income of the family. Money saved from these free services will be added to the income of the family. Family income is divided into three types- namely money income, real income and psychic income.

(a) Money Income:

In the modern world, work is paid for in terms of money. The family gets money income in the form of salary, pensions, wages, dividends, interest and rent. Money income is used to buy goods and services required for daily living and past, saved for future use.

(b) Real Income or Non-money:

It is defined as the "flow of goods and services used or available for any given period of time" (Nickell and Dorsey). Real income is derived as a result of efforts put in by the members of the family, without the use of money income. Facilities of a free furnished house, telephone at residence and car for private use provided by some employer are some good examples of real income. The community provides another form of real income for family use, through its public schools, libraries, parks, markets etc. The family that makes use of these facilities can increase real income considerably without expenditure of money.

(c) Psychic Income:

By the use of money, goods and services are obtained in order to fulfill the needs of the family members. Thus it brings satisfaction to its family member which is called "Psychic income". This is purely subjective in nature and can not be measured. Psychic income is relative in nature, but very important to realise, in order to achieve the family goals.

Money management like other management processes involves planning, controlling and evaluation. The main objective of money management is all round development of the members of the family, enhancing their happiness and health by making best use of the income of the family. To achieve these goals both husband and wife should prepare the family budget together considering their source of income, expenditure and need for future savings for their families.

Household Accounts

Financial planning and execution is important to all families and a day-to-day business of the household manager. In the present day economic scenario may be at the national level or a single family, management of money is the most crucial and complicated affair involving the achievement of common goals and long term program in family life.

Keeping records of the expenditure incurred in the family is an important feature of family finance management. Records or account keeping helps to make better plans and controls can be executed intelligently. Even simple records consistently and carefully kept will help one to ease the process of finance in a family.

Household accounts are essential short term records showing the expenditure of realized income in terms of money or cash expenditure and in terms of real income where goods form an appreciable part of the realized income. Hence household accounts are referred to records of current cash expenditures from money income. In other words, the daily income and expenditures of the family.

Procedure of keeping Household Accounts

Household accounts can be maintained as per the personal choice of the household manager. However, the most widely prevalent form of recording household accounts is 1. The sheet, 2. Envelope, 3. Notebook and 4. The card-file system.

Sheets:

Household expenditure records can be kept in sheets. The method is simple, flexible and convenient. Any expenditure incurred can be written on the sheet and tacked at the back of the door, end of a cabinet or any convenient place with a pencil hanging. However, its adequacy is questionable.

Envelope system:

Two types of envelope system are commonly followed. The first variety is the cash payment system that consists of putting the money in separate envelopes for each item of expenditure and writing the amount and the item name on the top of the envelopes. Such a system brings planning and accounting close together. This system is normally used by people who receive the money weekly and operate almost entirely on a cash method of payment. This system is direct and simple, highly flexible, adequate and convenient if money for change is anticipated and supplied. But this method is not desirable for higher income families as large amount and frequent cash transaction might prove unsafe and inconvenient.

The second envelope type is a pure sheet accounting system, where a large envelope either single or double is used. All the bills, slips, rotations and memoranda are inserted into the envelope and the recording of the expenditures is done at a convenient time. The outside cover of the envelope is used for totaling and summarizing recordings. This system is simples, flexible and convenient. It is likely to be adequate because if there is not enough area on the outside of the envelope, a sheet can easily be added and slipped inside the envelope.

Note books:

In keeping household accounts, either bound or loose-leaf notebooks may be used for keeping household accounts. The loose-leaf book may have the advantage of being more flexible than the bound book, because new leaves can be easily added and old ones replaced. If a loose-leaf book is used one with metal strip fasteners will be found to be more durable than the ring type. The spiral notebook is not a loose-leaf book but a type of bound book. Notebooks are especially convenient when children are involved in account keeping for they are durable and will withstand much handling.

Home Management

The card-file account system:

This type of household accounts system is highly flexible, adequate but may not be simple or convenient as it involves a lot of arrangements of the cards for different items of expenditures. Hence this process of accounting is called as the one-man system.

Supplementing Family Income

Supplementing family income implies the additional earnings or income for the family, apart from the regular family income. Money is not always available to a family in the same amount all the time. For variety of reasons the family may need to seek ways and means of obtaining additional income in order to make both ends meet. This need arises if the expenditure exceeds the total of the assured and probable income.

Generating supplementary family income is often dependent upon the interest, attitude, abilities, skills and talents of the members of the family. It requires time and energy to take an extra work and earn additional income. More than anything else, it is the attitude of the family members to earn extra to enjoy life or to keep for the rainy days. Skills or knowledge can be utilised for the production of goods or may be shared with others in the form of tuitions, classes in working, sewing, painting drawing, music or handicrafts, kitchen gardening and day care centers, etc. Overtime work or additional part time employment may also be resorted to.

There can be very many factors, which affect in earning the additional increase for the family. However, one need to consider the following points, while preparing for supplementing family income, in order to avoid any future problem. There are-

  • Availability of the time, space, energy and small amount of money to invest to earn more.
  • Availability of space, support and assistance of varied nature.
  • Unforeseen risks involved.
  • One's own interest, education, abilities & skills to carry it out to earn more.

Savings

"Savings are the means to an end". It represents the provision made at any point of time for use at a later time. These are the difference between earnings and expenditure of the family, which is kept as savings for the future use. There are several reasons and need for savings, some of them are foreseeable while others are not. Provision for old age, children's education marriage, house to stay after retirement and medical expenses are some of the common reasons for a family to put money by way of savings. On the other hand, there are often contingencies which are not foreseeable.

An accident of the main bread­winner of the family may lead to sudden drop in the income of the family. Even illness in the family may mean that expensive treatment require more money to spend, which only savings can fulfill these requirements.

Moreover, savings can itself be made to earn, more money. Savings are must for any householders, which has to be planned and understood properly both by the husband and wife for their own future wellbeing. It is however, essential to understand what and how to do savings for better return, as savings if kept idle, do not give any benefit. In olden days, savings used to be in the form of gold and jewelry. Gradually other forms of use of savings were inexistent, such as various forms of bank deposits mutual funds, saving certificates, postal deposits and insurance policy etc. In India jewelry or gold still continue to be considered as the best form of savings for the family. The mostly common ways of family savings are as follows:

1. Bank Accounts:

A bank does business by taking charge of peoples' money and lending it to those who need it. The bank pays interest on the money it collects which are called "deposits". There are different types of bank accounts, with different rate of interest depending upon the period of deposit. "A Savings Bank Account" is to encourage savings. The account earns a small interest which is calculated every six months. A "Fixed Deposit" account requires deposit of money for a specified period during which it can not be withdrawn. It earns more interest then the savings bank account. Another type of account is "Recurring Deposit Account", which can be saved every month with specific amount.

2. Post Office Savings Account:

As post offices are more in number and spread all over the country they form convenient places for having savings accounts. Moreover, operation of this account is very simple, even the housewife can operate the accounts within her reach.

3. Provident Fund:

This is an attractive method of saving for persons in service. The employers deduct a specified amount every month and in some cases also add an equal amount to the account. The total amount with interest is paid to the employee at retirement. It has income tax benefit also. One can even take loans from these accounts for specified purposes

4. Cumulative Time Deposit:

This is a deposit for a predetermined number of months or years and the payments are to be made every month of specified amount. Both the deposits are the interest paid at the end of the specified number of months or years. These are available both in Banks and Post Offices as well.

5. Chit Funds:

Chit funds have been a popular method of saving for a long time now. There are varieties of chit funds. The commonest of these is the "Lottery chit", in which a group of people contribute periodic payments of specified amounts for a certain period. The promoter normally gets the collection of the first period. During the succeeding period, the names of the contributors are written on pieces of paper of which one is picked for each such period and each person gets the fund in turn.

6. Shares in Public Limited Companies:

This is becoming a very popular way of savings, as it gives much more return than any other ways of savings. If you buy shares in a company you become a part owner and get entitled to receive a share of the profit which is called a "dividend". Investment in shares must be done with utmost care, as it involves risk also. If the company does not make a profit, the investment does not yield a return also. On the other hand, if good companies are selected for investment, the dividends can be more than the interest on fixed deposits with any banks.

7. Life Insurance:

This is, perhaps, the most widely used method of savings which as a result becomes an investment. Life insurance builds into the family's financial planning an element of economic security which in turn contributes towards greater emotional security.

It is a painless way of building a fund for a contingency like the untimely death of the main bread-winner or foreseeable event of a daughter's marriage or the expected expenses for the higher education of children. It is for this reason that Life Insurance is generally to be decided upon early in one's life, so that it can be built over a larger period with smaller contributions. There are different types of Life Insurance Policies, providing different benefits to the beneficiaries. They are-

(a) Whole life policy

(b) Endowment policy

(c) Retirement policy

(d) Child Plan policy etc.