Is there a simple key to financial health?

You can’t go wrong with this formula: live within your means and save enough to create a comfortable buffer between life as you know it and unexpected hardship. Sometimes, this may mean living below your means, at least temporarily, to build up your savings. It is better to have sizeable savings that you never need than to spend as you please, only to find that there is nothing left to help the household in extraordinary circumstances.

Before you do anything else, establish the size of the gap between your expenditure and your income. Expenditure should be as far below income as possible. To find out what the gap is, create a budget plan. Write it down to provide a physical record you can refer to so you will not forget anything or mix up your numbers. List all your expenses and all your income. This requires diligence. You must record all of your expenses for at least one month. For the purposes of budgeting, this must be every expense, even a $1 newspaper; people are often aghast when they see how much mindless, unrecorded spending they do. It is easy to spend above your household’s means without due consideration to the income-expenditure gap, and that is how households get into debt.

Next, establish how much of your household income you spend on necessities. It is important to be tough on what constitutes a necessity and what constitutes a luxury. A good rule is to think of absolute necessities in terms of nourishment, shelter, medical care, clothing, education, communication and transportation. Any expense that does not fall into these categories is a luxury, no matter how useful.

Now apply the 50 percent rule. If you are spending less than 50 percent of your household income on necessities, put aside 50 percent anyway, and let the excess roll over each month, quarter or year. In the long term, you will build up considerable reserves for use in emergencies (and this cushion means that occasionally you can splurge on something special). If you spend more than 50 percent of your income on necessities, examine each individual expense to see if it is possible to cut costs. Some suggestions: buying cheaper brands at the grocery store, getting a slower Internet connection, taking public transport once a week or even moving house if necessary. Remember, 50 percent allocated to necessities is a minimum goal, even if this requires living below your means.

Use credit and debit cards to track spending, as every transaction is recorded monthly. If you use an Internet banking service, you can see these transactions as soon as they happen. However, use credit cards wisely. While spending can be usefully tracked later, at the point of sale a credit card can make it seem that the money spent is not real, and that leads to casual excess. If you suffer from this pitfall and find yourself frequently unable to pay off your card bills in total every month, then use cash wherever possible. Many people find they spend less when they use currency, which they can actually see diminish in their wallets.

If you have outstanding debt on credit-card accounts, paying it off should be a high priority. Start with the cards that charge the highest interest and work your way down. If you have multiple cards, consider closing all but one or two that have the lowest interest or fees.

Next, you should aim to save at least 10 percent of your income. This is your fund for emergencies only and is the minimum you should put aside. Set yourself a goal higher than 10 percent, and see how high you can go. Put this extra money into your emergency fund (or start a slush fund for luxuries).

Large and expensive emergencies rarely give warning. Therefore, it is important that you build up a sizeable fund of emergency savings as time goes by. The best approach is to put your money into rolling term deposits that allow you to make monthly or quarterly deposits. Choosing a short- or medium-term deposit means the funds will not be out of reach for too long, but the penalties involved will discourage you from making withdrawals on a whim.

There is one final element to making this work, which is arguably the most important: teamwork. All members of your household should agree to the budget plan or it will fail. Budgeting can be tedious, but it is worth it to secure your family’s financial security. And if it becomes a lifetime habit, who knows? You might find as you get older that you are sitting on a fair amount of unspent cash. That is always a good thing.