household budget.pdf

Household Budget Purpose 1. Calculate Amount and When (calculate the money coming in and when it is expected, a budget helps a household to live within its means, it acts as a financial control mechanism that can be used to measure actual cash flow against planned cash flow, enables households t...

Household Budget Purpose 1. Calculate Amount and When (calculate the money coming in and when it is expected, a budget helps a household to live within its means, it acts as a financial control mechanism that can be used to measure actual cash flow against planned cash flow, enables households to plan their finances sensibly) 2. Identify and Plan for High Expenditures (identify times when there will be high expenditure, a household must be able to pay its bills as they fall due, a budget lets the 16 household know in advance when it is going to run short of money, households can plan, prioritise and live within their means as per the budget) 3. Identify and Plan for Deficits (to identify times when cash flow problems (deficits) will occur, the household can then take corrective action and solve these problems by reducing expenditure eg cutback on discretionary spending, increasing income eg through working overtime or by arranging some additional source of finance eg bank overdraft) 4. Identify and Exploit Surpluses (to identify periods of time in the future when the household will have a surplus of income over expenditure, this enables the household to place these surplus funds on deposit with a financial institution to earn extra interest or to use for discretionary expenditure) Household Budget Format 1. Income 2. Expenditure (fixed, irregular, discretionary) 3. Net Cash (total income – total expenditure) (1 – 2) 4. Opening Cash Balance (last period’s closing balance) (last period’s 5) (opening cash balance in the total column is always the same as the opening cash balance in the first time period column) 5. Closing Cash Balance (net cash + opening balance) (3 + 4) (closing cash balance in the total column should equal the closing cash balance of the final period as well as the total column’s net cash + opening balance figures) Household Budget Analysis -evaluate the net cash line, this reveals whether or not the time period’s cash flowing into the business is greater or less than the time period’s cash flowing out of the household -evaluate the closing cash balance, this indicates what will be happening in the household’s bank account from one period to the next, it forms the opening cash balance of the following period -analysis which time periods have a cash deficit and explain why this occurred (what cash outflows caused this) -address how cash deficits could be dealt with 17 -address how cash surpluses could be best used Addressing Household Budget Net Cash Deficits 1. Raise Finance (find additional finance to cover cash shortages eg arrange a bank overdraft for the months the household is in deficit) 2. Reduce Expenditure (reduce irregular expenditure eg cutback on electricity usage through shorter showers and energy saving bulbs, defer purchase or payments of capital large expenditures to later time periods until sufficient cash is available eg delay new car purchase until next month or avail of financing options to spread out cost, cutback on discretionary expenditure until cash funds are sufficient eg adopt more frugal lifestyle and cut out daily coffees) 3. Increase Cash Inflows (work overtime, apply for any applicable household grants or tax reliefs eg fuel allowance, rent out a room in home earning up to €14,000 annually tax free under rent-a-room relief scheme) 4. Shop Around (search for cheaper suppliers of household overheads or renegotiate payment terms eg change insurance providers, negotiate lower monthly phone bill, buy cheaper groceries) 5. Seek Advice (meet with loan providers to renegotiate terms of outstanding credit facilities, seek guidance from national Money Advice and Budgeting Service (MABS) or gain support from local credit union) Addressing Household Budget Net Cash Surpluses 1. Save (use the available surplus of cash to invest in a savings account to earn interest) 2. Purchase (purchase any necessary fixed expenditures eg car etc) 3. Pay Debts (pay off any outstanding or upcoming bills to avail of prompt payment discounts, improved credit worthiness and to avoid any late payment penalties eg credit card bill) 18 Household Budget Example Analysis of Lee Family Household Budget -January had a net cash surplus of €2,300 as total income exceeded total expenditure by €2,300. The Lee Family had a larger inflow of cash of €2,300 than an outflow of cash. -The opening cash balance of €500 caused January to end with a closing cash balance of €2,800 which formed the opening cash balance for February. -February had a net cash surplus of €3,300 as total income exceeded total expenditure by €3,300. This month wages increased by €500, it can be assumed that a member of the Lee family worked overtime to increase income. Lee Family January February March Total Income € € € € Wages 5,000 5,500 5,000 15,500 Child Benefit 500 500 500 1,500 Total Income 5,500 6,000 5,500 17,000 Expenditure Fixed Mortgage 1,500 1,500 1,500 4,500 Insurance 600 600 600 1,800 Irregular Groceries 100 200 100 400 Electricity 400 300 400 1,100 Discretionary Holiday - - 6,000 6,000 Entertainment 600 100 500 1,200 Total Expenditure 3,200 2,700 9,100 15,000 Net Cash 2,300 3,300 (3,600) 2,000 Opening Balance 500 2,800 6,100 500 Closing Balance 2,800 6,100 2,500 2,500 19 -The opening cash surplus of €2,800 caused February to end with another positive closing cash balance of €6,100 which formed the opening cash balance for March. -March had a net cash deficit of -€3,600 as total expenditure exceeded total income by €3,600. This month there was a larger outflow of cash than there was an inflow of cash as the Lee family spent €6,000 in discretionary expenditure through the purchase of a holiday. -The opening cash balance of €6,100 caused March to end with a positive closing cash balance of €2,500 which equals the total column’s closing cash balance. -Whilst in a positive financial position, the Lee Family could further improve their financial health through spreading the building purchase of the holiday over a defined time period through availing of a short-term loan in March from their local credit union. This would have avoided the cash deficit for this month. -Furthermore, the Lee family could gain greater control over its regular expenditure through shopping around for cheaper insurance providers or by renegotiating the terms of their mortgage with their provider. -The household could also reduce its irregular expenditure through shopping around for cheaper groceries or ordering their food shop online to reduce impulse purchasing. -The family could cut back on discretionary expenditure like entertainment and set aside a maximum amount per month rather than spending large amounts such as €600 in January as opposed to €100 in February. -The Lee’s could increase their income through working greater overtime particularly in March before their holiday to reduce the effect of the net cash deficit. -The Lee’s could further reduce their expenses through applying for any applicable additional government tax reliefs or grants such as the energy credit as approved in Budget 2023. -If appropriate, the Lee’s could also rent out a room in their home and earn an additional €14,000 annually tax free under the government’s rent-a-room relief scheme.