Money Management
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 adjusting. 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.
Direct Income
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
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 neighbors sometimes give
Page 1 of 8
each other home permanents and students sometimes trade textbooks at
the beginning of a new term.
2) Psychic Income
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.
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
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,
Page 2 of 8
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.
Advantages:-
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.
Significance:-
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 brings 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
Page 3 of 8
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
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
3) housing
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
Page 4 of 8
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 its 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
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
Page 5 of 8
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
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
Page 6 of 8
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.
Other devices helpful in evaluation:
Net worth Statements : Net worth indicates the amount of assets
Page 7 of 8
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.
Page 8 of 8
