15 MONEY MANAGEMENT
V. Meena
Learning Objective
To determine the flow of money in family and to manage the resources within the income.
Introduction
Money plays an important role in the life of man as an instrument through which he can satisfy his physical, material and mental needs. The income and expenditure pattern of the family decides the family’s standard of living and its place in the society. It decides the economic well-being of the family and the nation. Its purpose is to simply lead a happy life with greatest satisfaction of family members from the resources in hand.
Development of each individual among family members, group satisfaction, fully utilizing and spending within the given resources and the chance to be a good citizen in this nation are the most important thing in getting satisfaction. The process of attaining family goal and individual goal within the resources are more or less same.
Types of Income
There are three major types of family income. They are
- Money income
- Real income
- Psychic income.
Money Income
Money income has the power of purchasing goods and services with Rupees or currencies, cheques and online transactions that flows into the family in a given period of time. Money income includes all the income received in the form of money like salary or wages, profit in business, pensions, royalties, house rent, gifts, interest earned from bank deposits and other investment. Money is valued by individuals and families because of its purchasing power over goods and services like food, clothing, shelter, education and medical expenses etc., some of which are vital for the survival of human beings.
Real Income
Apart from money income, families may also receive real income. Real income is the flow of commodities or goods and services available to families for satisfying their needs and wants. Real income is derived from the use made of money income, together with that added without the use of money. Knowledge contributed and services rendered by members of the family, especially woman are an important part in real income. Real income can be classified as direct and indirect.
Direct Income
It consists of those material goods and services available to the family members without the use of money. Examples are vegetables, fruits and flowers from home garden as well as other services. These services include those of the home maker who prepares food, cares for the family members, clean the house. Employment benefits offered by employers to employees such as free housing, medical aid, free education schemes, loan facilities represent direct real income. Library facilities, parks, schools, fire protection, community hall, police protection are commodities and services for which families need not spent.
Indirect Income
Indirect real income consists of those goods and services available to the family involving the use or exchange of money example paid help for household activities.
Psychic Income
Psychic income is that flow of satisfactions that arises out of our everyday experiences, derived largely from the use of money and real income and making for psychic and physical well being. This is the satisfaction which people experience. It consists of the mental and emotional satisfaction received from the use of money and real income. Example Children’s education and marriage.
Expenditure
Happiness of the family is secured by income use or expenditure. Expenditure provides the satisfaction of life for the members of the family. All expenditure for the household may be divided into needs and wants. The needs are those which are necessary for maintaining a healthy, efficient household which a family must take care of and there are emergencies and special demands arising occasionally.
The regular monthly items of expenditure for most families include food, clothing, shelter, education, health, housekeeping and recreation. Part of the income may be set aside in the form of savings for special needs or emergencies such as marriage, education, pleasure trips or sickness and old age.
The various factors that affect one’s expenditure are:
1. Family size.
2. Income of the family.
3. Age and occupation.
4. Education.
5. Location of the house.
6. Health status of the family members.
7. Interests and abilities of the members.
8. The availability and price of the goods.
9. The customs of the family.
10. The personal likes and dislikes.
11. The general consumption pattern.
12. The saving pattern of the family in the future.
Guidelines in Money Income Management
According to Nickell and Dorsey, there are seven guidelines
1. Clearly recognize and define goals, because they set the pattern for money use.
2. Analyse probable income thorough time that is short and long view including retirement.
3. Recognizing the stages of family life cycle, with the phases of each stage and forecasting needs for money during each stage.
4. Coordinating plans for shorter and longer periods.
5. Deciding on the method of handling money that will satisfy all members of the family.
6. Actuating plans by using the method chosen.
7. Controlling the use of money as planned and evaluating the plans and results concurrently.
In order to show how an analysis of the short-period money income can be useful in planning family expenditures, the profiles of money incomes are typical of several occupational groups are presented here. Such examples help in understanding the flow of income for the year, showing where points of high or low supply can be anticipated.
Profile 1 show the income spread evenly over the entire 12 months facilitates the planning of its use. A regular income being assured month by month, future planning can be concentrated on long-time demands.
Profile 2 pictures an increase at one point that carries throughout the rest of the year.
Example one time increment
Profile 3 shows the line which represents a constant wage or salary for part of the year and none for the rest of the year example Teachers, as a group, have this type of income.
Profile 4 depicts Seasonal workers, such as fruit and vegetable pickers or wheat harvesters, those who have chance employment.
Profile 5 pictures the income of the professional man or businessman who is not on a salary, or who is on a salary plus commissions, or on a salary that is augmented by earnings from investments.
Profile 6 represents an income with two major peaks, although there could be more than two. The income of the farm family derived mainly from sale of stock in spring and grain in fall is an example of such a stream.
Profile 7 shows the probable income pattern of such groups as artists, writers, inventors, promoters, or freelancers who may have one or a few sales a year. There is one single point of productivity when a sum large enough for the whole year comes into the family treasury, although the profile might include more or lesser peaks.
Methods of Handling Money
According to Nickell and Dorsey, the choice of method in handling money gives members of a family a feeling of satisfaction is a matter of major importance in the life of any family.
Five major methods of handling family income may be used:
1. The Family Finance Plan, or Budget:
Budgeting
According to Mullick, the common planning device for the use of money is the budget. It is a carefully prepared spending plan based on the actual family income. It is a plan based on previous experience, present needs and future expectations. A budget is always prepared for a fixed period of time generally for a month.
Importance of Budgeting
1. Budget helps to monitor the flow of money.
2. It enables a family to have an overall view of their income.
3. Budgeting facilitates adjusting irregular income to regular expenditure.
4. Budgeting helps people to discuss their needs and set their own priorities on them.
5. It helps one to cut unnecessary expenditure.
6. It helps one to be free from debts.
7. It helps one to live within one’s income.
8. It encourages conscious decision making which may help in including long term goals in the Budget.
9. It relieves the family members from worries of future.
10. It forces one to decide what one wants most out of life.
11. It provides for future saving.
Budget is a guide to spend money and to avoid over expenditure. Its success depends upon its being simple, realistic, flexible and suitable to the family or individual for whom it is made. Control of the plan in action is impossible without a written plan. Planning is mapping out of future action. A written plan can serve as an excellent record for future planning. A mental plans though it may serve the effort of noting down, it may not help in controlling expenditure. It leads to mental stress and always mind will be occupied in one action.
Steps in Preparing the Budget for a Family
a. List all the needs and wants of the family members.
b. Estimate the cost of desired items. Total each classification and estimate the total for the budget. Past records are helpful in this connection (Bills, cheques, receipts etc.)
c. Estimate and total expected income from all sources for the budget period.
d. Set aside a definite sum as emergency fund as well as for goal oriented savings and insurance.
e. Bring expected income and expenditure in balance.
f. Check the plan whether realistic.
The list of Budget Items
It is necessary to list the essential items to make sure that each item is attended in the expenditure plan while portioning the income. Each family may have their own way of listing the items.
The chief budget items are:
Food:
Food is the most important of all the items since it is a necessity. The quality and quantity of food available for the family affects their health, efficiency and happiness. Hence the expenses on the actual purchases of groceries, meat, egg, milk, fruit and vegetables are included under this head.
Clothing
Only items bought from a shop are to be included. These may be garments, shoes or other accessories needed by the family. Fabric cost and tailoring charges may figure in this group. However, it will not cover expenses likely to be incurred on laundry, dry cleaning and repairs of the above items.
Housing
This includes charges on a rented house, repair charges and maintenance charges paid by the tenant. This does not include sums paid towards the purchase of a house or plot, fixtures, electricity and water charges.
Education
The educational expenditures depend upon the importance attached to education. All expenses incurred in connection with school or college education such as tuition fees, other fees, cost of note- books, text books, stationeries and so on.
Transport
It includes the expenses incurred on the use of public or personal transport. This would include the cost of fuel, service and maintenance charges, repairs, road tax and insurance.
Personal Expenses (Sundries)
The purchase of toiletries, laundry and dry-cleaning charges, cost of subscription to membership fees of clubs and associations, purchase of gifts, medical bills, expenses incurred on cultural and recreational activities.
Household Expenses
All the expenses for running the house- electricity, water, fuel, telephone bills, tax, wages of part-time and full time helpers are included here.
Engle’s Laws of Consumption
A German statistician by name Earnest Engle found a statistical analysis of budget facts by research. The principles enunciated by him through his study of family budgets are known as Engle’s Laws of Consumption. They are:
“As income increases, the proportion of income spent on food decreases, though the actual amount of money spent on food increases”.
“The proportion of income spent on sundries, cultural wants, recreation, education, health etc. increases as income increases”.
The proportion of income spent on shelter, clothing, lighting and fuel remains practically unchanged whatever the income may be.
Family Budget
The expanding family consists of husband and wife with two school going children living in urban area. The budget should be kept for reference during the budget period for exercising control over expenditure in the succeeding month. This would help to live within the income to save for future and provide for emergencies without increasing unnecessary debts.
Supplementing Family Income:
Supplementing or enhancing family income is very much possible if one takes up certain activities during the leisure time. Subsidiary occupations are activities which augment the main income and thereby help to utilise their leisure. Leisure time available to certain group of people can be fully made use by such creative activities. Especially in rural areas people are not employed during the off season. To them subsidiary occupation is a boon.
Kitchen gardening, poultry keeping, dairy farming, goat rearing, basket, making, book binding, cartoon making, various craft works, embroidery, garment making, drawing and painting, doll making, spinning and weaving are a few of the subsidiary occupations one can take to enhance the family income. Apart from this, the family’s real income can be improved by the wise management of the family, so that thrift is followed in spending money. A homemaker needs to be a wise manager in planning the expenditure, investing in savings for the future etc. to meet the varying needs of the members.
Wealth from Waste
Man utilises resources for his everyday activities producing and consuming food. Waste is simply some useful substances that do not know to use. Waste can also be described as a resource out of place. It should be realised that waste is a treasure which could be recycled to form wealth. It is technically possible to recover atleast two third of the resource, that people waste in everyday life. Recycling of waste reduces the cost of disposal and provides extra profit by reducing wastage of resources.
Finding Creative use for Waste Materials
Used tooth brushes are excellent for cleaning combs. An old cooker gasket can be wound with a rope and can be used as hot pads on the dining table. It can be wound with colorful wool thread, plastic wire and used for decorating the walls at home. Small scraps are used for repairing and decorating old garments for making rugs, bags and soft toys and in many places for enchanting patch work in table cloth, wall hangings, etc. Old cloths can also be used for stitching colourful bags, cushion covers and window curtains. The wastes like empty bottles and tins can be made into beautiful flower vases and containers.
Methods and Benefits of Reusing Household Waste
Food wastes are, the animal, fruits or vegetable residues resulting from the handling, preparation, cooking and eating of foods. Due to food shortage it is necessary to prevent food wastages and make use of the wastages in cooking. In vegetable cookery certain amount of wastage occurs by peeling the skin portion of certain vegetables. The skin of ridge gourd, beetroot, seeds of bitter gourd, snake gourd can be used for preparing chutneys. Ladies finger toppings can be added to blackgram while grinding it for idli or dosai. Left over rice could be used to prepare rice vathals.
Account Keeping
The best way to determine the family income is being well spent is by maintaining accounts. While the budget is a plan for future spending, account keeping is a record of past spending. A household account is a record of expenditures actually incurred by the family in the course of a day, or a month. It will include the income earned by the family, the expenditure incurred and the amount spent on each item of expenditure. Generally accounts help to
1. Show where the money goes actually.
2. Check the amount spent on each item according to the budget.
3. Check the adequacy of allotting the income over the items.
4. Give basis for a better planning of expenditure in future.
5. Change our way of life either by reducing the consumption of certain costly food items, or taking up extra job etc.
Different methods of accounting used in the household are given below.
1. The Sheet System
It is a very simple method. Single, double or multiple sheets can be used for keeping accounts. The sheet along with the pencil can be hung in any convenient place example back of door, shelf, window or refrigerator sides. Very often expenses can be written and viewed in a convenient place.
2. Note book System
It is a very convenient method. Either bound or loose leaf notebooks can be used, since here insertions can be made easily. The book should have columns to indicate the total income, the date, the account head and daily expenses. Neat recording prevents confusion. Calendar and diary are also helpful to keep the accounts.
3. The Envelope System
In one type, a number of envelops are kept for different budget heads. The portion of allotted income is put in the envelope for each item as per the budget allocation. This system is essentially helpful for those who earn weekly wages. In another system, a large envelop is used in which day to day bills, slips, tickets etc. are put. Later at a convenient time, they can be accounted. The outside of the envelope may be used for noting down the expenses. This will be an apt one because it reduces confusion.
4. Card File System
Separate cards may be maintained for income – budget allocation, and expenditure on each budget head. All expenses are entered as and when they occur day wise and categorised under each head. Various cards can be filed together. While keeping accounts, one should start a convenient system that is easily workable and make account keeping a regular habit.
Savings
Money has to be set aside for investments, insurance premium, for chit funds and other schemes. Best thing is first plan and keep the savings money aside then start spending money for other expenses. Savings may be temporary or permanent. Temporary savings are designed to achieve immediate goals for example purchasing household equipment or going for a trip during vacation.
Permanent savings are set aside for future security. The following are the reasons for savings
1. To meet the demands at the time of fall in income during old age, sickness and unemployment.
2. To meet increased expenditure caused by illness, accidents, robbery or household repairs.
3. The desire to buy capital goods or assets like land, house and durable goods such as four wheeler, refrigerator etc.
4. For pleasure trip during holidays.
5. To celebrate functions and festivals.
6. To meet the expenditure on higher education and for marriage.
7. To invest in business.
8. To gain social status and economic security.
9. To provide a secure life for the dependents.
10. To attend the social functions like marriages, birth day parties, etc.
Savings play an important role in raising ones standard of living and improving the quality of living also. Infact, savings well invested can help to generate more income. Savings give mental satisfaction and the capital to build up the nation’s progressive plans.
Different Types of Savings
1. Individual Savings Individuals have been in the habit of saving in one form or the other. Traditionally people were saving a part of their income in the form of commodities, animals, precious metals like gold and silver.
2. Corporate Savings Corporate savings are exercised by some agencies or companies which highly help in the capital formation of a country (e.g.) Banks.
3. Compulsory Savings When the state exercise an element of compulsion or force in making the individuals to save, that is called as compulsory savings (e.g.) Employee’s provident Fund, General provident Fund.
Factors Affecting Savings
The factors such as income, current needs of members, habit for thrift, opportunities available for savings, the provision for future, and the size of the family, the standard of living, the cost of living, the economy of the country and the willingness of family members have a bearing on savings.
Institutions which Promote Savings
Several institutions are ready to help a person to save periodically by offering various attractive schemes.
The Role of Post Offices
Post offices have been rendering banking services along with its postal duties. In the post office savings account, an amount of Rupees five and above can be deposited at anytime, but withdrawals are allowed once a week. The deposited amount earns certain percent of annual interest. The interest is exempted from income tax. The post offices also provide five year and ten year recurring deposit schemes. An amount of Rupees ten and above can be deposited every month in this account. At the end of the period, the capital with some interest is repaid to the depositor. This scheme is helpful for those who receive regular monthly income by way of interest.
National savings certificates are sold in post offices for a minimum of rupees one hundred and above. It qualifies for income tax rebate. At the end of six years, the amount together with interest is repaid. The annual interest accumulated is also exempted from income tax as it is again re-invested in the same scheme. National savings scheme account can be opened in major post offices by depositing a minimum of Rupees one hundred. Loans are granted after a period of three years from the date of opening the account. For the entire post office small savings scheme, gift coupons were given by the government of Tamilnadu and various prizes were provided to the investors.
Role of Banks
The main purpose of the banks is to accept deposits and to lend these deposits to reliable borrowers at a higher rate of interest. Savings bank account is a system where small deposits are accepted. Deposits may be made at any time, but interest is calculated for a minimum period of three to six months. In the case of fixed deposit account, the depositor withdraws the deposited amount only after a fixed time. As the period increases the interest also increases. It is suitable for those who want regular monthly income. The Recurring Deposit scheme, marriage deposit scheme, loan linked deposit scheme, prize deposit scheme, double benefit schemes are the other schemes offered by the Banks for the welfare of the people. Loans at a lower rate of interest are advanced to farmers by the banks.
Role of Life Insurance Corporation of India
Life insurance is a contract between the individual called the insured and the insurance company. Here the insured makes payment of money every year or at different intervals. In return, the company agrees to pay a certain amount after a specific period or at the death of the insured to a third party known as the beneficiary. In the case of the death of the insured too, the family can lead an economically secured life. The premium amount that one has to pay varies according to the age of the insured, the sum insured and the period. Following are some of the various forms of life insurance policies now in force: Jeevan mitra, Jeevan sathi, Jeevan surabi, Jeevan akshay, Jeevan anand and so on.
Unit Trust of India (UTI)
This is a public Sector financial institution and offers various schemes for attracting investments from the public. The Unit Trust Offers a safe way for people to invest their money in companies. The Unit Trust buys shares and stocks in various companies. Individuals can buy units from the Unit Trust. Each unit has a face value of Rs.10 and units can be purchased or sold. The income earned is passed on to the unit holders as dividends and capital appreciation. Besides selling units, the Unit Trust has also other schemes such as Unit Linked Insurance Plan (ULIP), Children’s Gift Growth Fund (CGGF) and Monthly Income Unit scheme to encourage savings.
Shares
Stock and share are the means by which the individual can become part owner. When a person buys shares, he enjoys certain rights like right to dividend, participate in the profit or in the assets of company when it gets wound up. Shares are also sold and exchanged in the stock and share market. The money invested is multiplied in a short time and it is suitable for those who want to make quick money.
Debentures
A debenture is a document or a certificate issued by a company as a proof of the money invested in the company debentures. The interest is payable periodically till the maturity of the term debentures and is paid along with the capital sum in case of cumulative debentures.
Provident Fund (PF)
This is a compulsory saving scheme for all salaried persons. This gives a lot of financial security to every employee. There are two kinds of provident Fund. They are the general Provident Fund (GPF) and Employment Provident Fund (EPF). Under GPF, a Specific amount or a certain Percentage of the basic pay is deducted from the salary of the employee every month. It is ideally suited because the accumulated amount is paid to the employee at the time of retirement. One can take loan upto 60% of his collection and return it later from his salary every month. This kind of provident fund is followed for government employees. EPF is a compulsory saving scheme for private company employees.
Summary:
On understanding where money comes from (income), where money goes (taxes and expenses), and how money can be managed (budgeting and saving) makes an individual or family to handle money with care. The concept of Money Management, Types of Income, The various factors that affect one’s expenditure, Guidelines in Money Income Management, Methods of Handling Money, Budgeting, Engle’s Laws of Consumption, Wealth from waste, Account Keeping and Savings were discussed under money management.
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