It is also known as income management or Finance management .Money is Non human or Material Resource which is being used for the attainment of Goal or fulfillment of any desire or want. Income is quantitatively limited Resource. Pattern of use of family income is affected by size of income , stage in the life cycle occupation of the individual or family.
A family’s money management involves decisions about all resources and reflects the complex value system of the family. Much of the foundation for implementing a budget is laid in the Planning process. The implementing process itself involves performance along with facilitating , coordinating ,checking , and adusting. As in all management , the limits of resources available and demands from the environment as well as chosen goals will be major factors in determining how financial resources will be used.
Types of Income Defined
1)Real Income :- Real Income is defined by economists as a flow of commodities and services available for the satisfaction of human wants and needs over a given period of time. Three important ideas In this definition are : first ,that income is a flow of economic goods as composed of commodities and services whether they are obtained by purchase or by other means and lastly ,that in order to see a particular income in perspective it is necessary to know what period of income is involved, whether a month, a year , or a lifetime.
Real income is made of two major types, Direct and Indirect .Direct income consists of those material goods and services available to the family members without the use of money. Examples include commodities such as products of flower and vegetable gardens .These services include those of the homemaker who cares for family members, such as those of the father who makes car repairs, the son who mows the lawn , or the daughter who does family laundry. Another source of direct income is free or social income provided by the community. Library facilities, parks ,schools, roads, fire protection , and police protection are commodities and services which families could not ordinarily provide for themselves.
Indirect income consists of those Material goods and services which are available to the family only after some means of exchange, ordinarily money. has been obtained. The commodities and services which are purchased with money range from small to big items like from cigarettes to cars and from the services of a medical specialist. for example neighbours sometimes give each other home permanents and students sometimes trade textbooks at the beginning of a new term.
Psychic Income consists of the satisfaction which person derives from their Real Income Psychic income is purely subjective and up to the present no attempt has been made to measure it. However , differences in psychic income are readily observable It is closely related to one’s standard of living and to the appreciations one has developed .If individual A actually possesses the commodities and services he considers essential, he will be satisfied , and the psychic income from those commodities will be high for the individual. On the other hand B , whose standard of living is different , may get either higher or lower psychic income from the same commodity or service. For example, one person whose standard of living includes several imported tweed suits receives less psychic income from an additional one than the woman who has never had a garment of imported tweed before.
The relationship relationships among the various types of real , direct ,and indirect income ,along with their sources are shown in the chart below.
I -Real Income – all material goods and services
A) Direct- economic goods available from the following sources without use of money 1). Material goods produced at home 1) Services provided by family members 2) “use” value owned durable goods 3) “free” or social income
B) Indirect- economic goods available to family through media of exchange such as :- 1) Money 2) Barter II Psychic Income –Satisfaction derived from all material goods and services
Total Income excluding psychic income consists of real income and in addition , that part of money income which has not been turned into economic goods , and so is not a part of real income. This additional income may be assigned to three different uses: Payment of taxes, savings for the future, or gifts to persons outside the family.
Many families are conscious of the need for learning how to manage their money. Since the majority of consumer goods today must be purchased, families recognize that better management of income may provide more of the goods desired. It deals with the managerial process applied to the use of money. Budgeting –frequently considered the whole of money management – is in reality only the planning step. Vital decisions equally important, to the success of the family’s money management, are made in the last two steps of the process. In the control step, methods of checking expenditures before overspending occurs and of making adjustments where necessary are considered in some detail. Evaluation of the use of money is considered from the standpoint of the extent to which the family reached their goals in general and those concerning the handling of in particular and the satisfaction derived from their use of money. The evaluation is carried out through the use of searching questions. Devices such as accounts, inventories, and worth sheets, which are helpful in answering some of these questions, are explained.
Budgets-The Planning step
The most common planning device for the use of money is the budget. A budget is a plan for future expenditures. As such, it represents the first step in the managerial process as applied to money .It’s success depends upon it’s being a realistic , flexible plan suited to the group for whom it was made, and, in no small measure, to the quality of the control and , and in no small measure, to the quality of the control and evaluation steps which follow.
Planning enables a family to take an overview of their use of income, thus seeing it in perspective Budget actually helps families see how they can use their income to attain first those goods which they consider most important. Spending without a plan frequently results in “frittering away” an income which is adequate to provide most of the goods desired by a family. An additional advantage lies in the fact that a plan for spending one’s total income cannot be made without deliberation.
A budget is much more than a plan for the use of money. A great deal can be learned about a family simply by studying its financial plans. Indirectly a budget determines the use of other resources and the kind of interests which will be developed. Financial management like all management is dynamic ; its value and the need for it remain constant throughout the family’s lifetime. Each stage of the family life cycle bring new problems and new demands upon resources. Thus financial management remains important throughout each stage of the life cycle.
Steps in making budgets:-
Budgets are made for the period of a month or a year. In reality, a budget would exist if only three steps were carried out.
• Estimate income
• Estimate expenditures
• Bring expenditures and income into line
However if given only these instructions most people would not know how to proceed, and the resulting budget would probably not be successful.
The five steps are :-
1. List commodities and services needed and wanted by family members throughout the proposed budget period
2. estimate the costs of the desired items , totaling each classification and the budget as a whole.
3. estimate and total expected income.
4. bring expected income and expenditures into balance.
5. check the plans to see that they have a reasonable chance of success
1) Desired items determined :- This step involves interpreting the goals of the family in specific goods, it requires considerable thought. The list of commodities and services should have three characteristics: it should be stated in terms of specific goods and services; and some order of importance should be established. The headings and sub-groups given below may be helpful:
1) Income Tax
2) Food and related costs at home Away from home Non-food items regularly purchased at food store
4) household operations fuel utilities household supplies other than two above paid service
5) house furnishings
6) transportation Automobile Public transportation
7) clothing (grouped according to family members) Purchases of garments Dry-cleaning and repair
8) medical and dental (including insurance)
9) personal allowances for family members
10) miscellaneous Education costs Reading recreation Occupational expenses Gifts Contributions
11) Provision for the future Savings Insurance (life and annuity) Investments Retirement Costs accurately estimated
The second step in making a budget is : estimate the costs of the desired items, totaling each classification and the budget as a whole . If a family is making a budget for the first time , this step will require considerable investigation. In fact, they may decide to keep records for a few weeks in order to obtain information about routine costs. At every stage of the life cycle or under changing circumstances, new demands upon money occur and the effects of these changes must be calculated .General business trends must be considered in making these estimates. For example if prices are showing an upward trend, sufficient space should be allowed to cover such increases.
The most satisfactory source of information on costs is the market itself, and it is helpful if sufficient time can be allowed during the planning stage to “shop around” and see what quality is available at what price.
Expected Income Estimated:-
The third step in making a budget is : Estimate and total the expected income. It is most important to be realistic in this stage of planning, for another frequent cause of budget failures is overestimating income. Income from all the sources should be taken into
consideration. Income of all the members should be included, such as Salary, wages, profits from an owned business, bonuses and gift, dividends from investments, and earning from odd jobs.
Expenditures and income balanced :-
Step four in making a budget is : Balance the Budget
As with each of the earlier steps, this is of great importance and requires careful deliberation. Budget is not complete until total expected income equals total expected expenditures.
Plans checked for realism :-
The fifth step in making a budget is check plans to see that they have a reasonable chance of success. This step actually a part of planning, is for the specific purpose of insuring the control of the plan as it is being carried out. The plans should be checked in light of the following factors: the particular need of the family as a whole and it’s individual members, possible emergencies, the solvency of the family at all times, the effect of world conditions, and the long time plans of the family.
Controlling the plan in action
As with all types of management, plans are unlikely to be carried out successfully unless some control is exercised. This is particularly true with a complex plan such as a budget. Control in financial management is usually of two types: first, checking to see how well the plan is progressing, and second, adjusting where necessary
Checking is of great importance since it helps one keep in mind the decisions which were made in the planning stage, and gives one the assurance of knowing whether or not adjustments are needed. Several kinds of checks may be devised.
Mental and Mechanical checks to spending:-
Among the most valuable devices for checking are those which are applied to current expenditures to avoid overspending before it occurs. These may be either mental or mechanical in nature. Mental checks are usually established by breaking the allocations into units which can be related to actual expenditures. A Mechanical check which is frequently used to set aside a certain amount of money in cash to be used for a particular item, and the actual disappearance of the money serves to show how rapidly the money is being spent. Many homemakers have a ‘FOOD ENVELOPE OR PURSE” in which the weekly allocation for food is carried. Other families have a series of budget envelopes or coin boxes so that the entire budget for a week or a month is checked in this manner. A major disadvantage of the latter method is that large amount of cash are maintained and should it be lost through theft or fire the results would be serious.
Records and Accounts :-
A second major method of checking the budget as it is put into action is the use of records or accounts which show the distribution of money after expenditures have been made. Such records can be quite casual, such as keeping of receipted bills and cancelled checks, or they can consist of formal and detailed accounts.
Adjusting is the second major method of controlling financial plans in action. There is a normal procedure; too often people forget that it was they who originally made the plan, and that they have the right to adjust it if they wish. Adjustments may be needed for several reasons. First , if the original was poor, changes will have to be made in carrying it out so that the family can achieve their goals .The plan may have been poor because income was overestimated , expenditures estimated , or the plan did not express the family’s real interests. When checking makes these faults apparent, new decisions must be made to correct the errors and revise the plan.
Plans may also have to be remade because of factors beyond the family’s control, or because of unusual opportunities which may not be available later. If the original plans are flexible and allow for emergencies, such control will be easier, serious illness in the family the death of a near relative, or an unusual business opportunity which necessitates a change of location might be reasons for changing the original plans. It must be remembered that these changes do not invalidate planning: rather, the original decisions serve as a base for the newer ones, showing where adjustments can be made with the least inconvenience.
A final reason that plans may need changing is that the family may not have set up positive methods for checking such as were suggested in the first type of control and therefore may not have set up positive methods for checking such as were suggested in the first type of control, and therefore may not realize that their plan is not functioning smoothly until there is a considerable gap between the plan and it’s execution.
New decisions required
Adjustments in the control step actually consist of decisions as to whether the original plan should be followed, completely revised, or merely changed in some details.
Long term adjustments sometimes necessary
Many families are aware that they need certain long term improvements to insure the success of future plans. A case in point is a young bride who realizes that she will never be able to cut food costs safely until she gains information on what foods are needed for sound nutrition and how to select foods in the market. The ultimate success of food budget depends upon these factors and her skill in food preparation. She can improve them gradually, eventually making control of her plans much simpler.
EVALUATING USE OF MONEY
The last step of management process is evaluation. Evaluation of the use of money is particularly important because so many of the satisfaction which families desire today are purchased with it. As was noted in the discussion of making budgets, the finished plan tells a great deal about the family, since no interest can be represented without the use of economic resources. In the evaluation stage the family must not only decide whether their planning and their control achieved the goals which they had set out to attain, but also they must decide whether or not these goals are as satisfying as they had expected. Evaluation in the light of specific goals: While the evaluation of the use of money involves human values and long term goals, and therefore touches on deep philosophical judgments, most families do not embark on a conscious program of money management unless they have certain rather specific and tangible goals involving money. These might include obtaining fair value for money spent, remaining solvent, providing for the future, and improving their economic position. Progress toward or achievement of these goals for money management can be checked. More and more people are recognizing that wise selection of articles and services on the market is a part of effective money management and attempt to evaluate their progress in attaining these goals.
Use of Accounts in Evaluation:
No doubt the family will turn to the records or accounts which were kept during the control period. These records have still another function to perform in evaluation. When summarized they show not only how much was spent in a particular category, but also the balance among categories and the net savings or loss for the year when total income and expenditures are compared. If the family decides too much was spent in one area, the itemization provided in the accounts, though brief, shows what was obtained for the money spent and enables the family to decide whether or not the total is justifiable. If they feel it must be cut in the future, the records suggest possible items to eliminate. These records are tangible evidence of which interests the family considered most important. They are a basis for deciding whether to continue in the same general trend, or to change it when new plans are made.
3Other devices helpful in evaluation:
Net worth Statements : Net worth indicates the amount of assets remaining after liabilities or debts are subtracted A net worth statement shows net worth at a given time, and a comparison of these statements at periodic intervals will indicate whether the economic position of the family is improving, depreciating, or remaining stable. It is possible for a family to have a minus net worth, net worth may be increased either by adding to what one possesses or decreasing what he owes, or both.
Net worth is obtained by subtracting the total amount of liabilities or debts from the total assets. This balance sheet makes possible the comparison of each item, as well as changes in net worth as a whole.