Financial Tip

Developing good money habits can help you reach your financial goals. Having and keeping within a family budget is a good money habit.

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Critical Sacrifices that can Make or Break a Family Budget

Critical Sacrifices that can Make or Break a Family Budget

If you are planning to start a family, brace yourself: The average cost of raising a child born today is nearly a quarter-million dollars depending on where you live - not counting inflation! And that doesn’t include the cost of college. While raising children takes priority in any family’s budget, parents also must save for retirement and account for unexpected expenses along the way.

So, what’s a family to do? Assuming you have already done the smart thing and created a family budget, you may still have to make some sacrifices to ensure your family is well taken care of and you don’t retire as a pauper. However, sacrifices don’t have to be painful. It often takes a small sacrifice to develop a good habit. Once it becomes a habit, you will be happier and better off in the long run. Here are two sacrifices that can make or break your new family budget.

Sacrifice #1: Live Beneath Your Means

If you and your spouse went to college, you both know what it’s like to delay gratification and get by on limited funds. You sacrificed financially to achieve your goal of getting a college degree. The problem is, once people leave college, they tend to make up for that lost gratification, so they manage to spend every extra dollar they have in that pursuit. If you ask most very wealthy families, they will tell you that the key to their financial success was not due to any extraordinary investments they made. Instead, it was due to living beneath their means, which enabled them to make the investments. If your goal is to save enough money for emergencies, a new house, college for the kids, or retirement, it is much easier to spend less money than making more money.

Some people consider living a frugal life to be a lifestyle sacrifice that might include

  • driving used cars,
  • buying less house or choosing a house in a less expensive location
  • dining out only on special occasions
  • taking staycations instead of vacations
  • shopping at Target for kid’s clothes
  • buying store brand groceries
  • forgoing the daily Starbucks coffee
  • forgoing premium cable channels
  • and generally watching their pennies on every purchase.

However, considering the thousands of dollars saved each year – all of which can go towards essential family goals – some people look at it as a means to an end. After all, any happiness derived from spending $100 on a new pair of jeans is only fleeting. That $100 invested in a stock mutual fund for the next 20 years could grow to nearly $400. Which would give you more satisfaction? By the time you want to buy a house or put your child through college, the jeans will be long gone.

The point is if you have financial goals, now is the time to sacrifice, at least until your earnings increase. Even then, you need to decide what’s more important – the instant but fleeting gratification of an impulse buy or realizing your ambition for a good life, the rest of your life.

Sacrifice #2: Put Your Credit Cards on Ice

Having credit cards is important for building your credit. However, one of the main reasons people use credit cards is to purchase things they can’t otherwise pay for with cash. Credit card purchases are easily rationalized because, even though you don’t have the cash to pay for something, it might only require a few months of payments to cover it. But then you layer another purchase on top of that, and another, and another, causing you to stretch your payments out a year or more. The interest costs mount up and, instead of putting the magic of compounding interest to work for you in savings, you are putting it to work for the creditors.

As part of your budget planning, you should vow never to purchase anything with a credit card that you can’t pay off immediately. Using one credit card to cover emergency expenses or to purchase regularly budgeting items may make sense from a personal finance standpoint if you pay the balance in full each month. Beyond that, your credit card use becomes a slippery slope.

The two dream killers for most families are living beyond their means and debt, which tend to go hand-in-hand. While it may seem like a sacrifice to delay some lifestyle gratification today, what you are really doing is building some good money habits that will serve you and your family well for a lifetime.

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