In my blog post dated May 29, 2018, we addressed the first of six keys to creating a financial plan: Risk Management. I wrote about how a well designed risk management plan can help protect loved ones from unnecessary hardship in the event of tragedy. Here is a link to that post – Risk Management.
The second key area in any sound financial plan is Cash Management. From paying down debt to funding college or retirement, planners guide clients through a vast maze of financial choices. Yet all that work rests on a single discipline: Cash Flow Management.
The first step in managing your cash flow should be the creation of a monthly budget; this will help you plan for how you will spend and/or save your money each month. It will also keep track of your spending habits. With a budget, you can begin to prioritize your spending and better manage your money and financial future.
How to Make a Budget:
- Gather all the financial information you can. This should include bank statements, credit card statements, investment accounts, recent utility bills, and any source of income or expense.
- Create a list of all your sources of income. If you are self-employed or have any outside sources of income, be sure to list these as well.
- Create a list of your monthly expenses. This list should include all the expected expenses you plan on incurring over the course of a month. Such as mortgage or rent payments, car payments, auto insurance, groceries, utilities, student loan payment or entertainment.
- Break expenses into two categories: fixed and variable. Fixed expenses are those that stay the same each month and are essential to your way of living. Variable expenses will change from month to month. Use this category when making adjustments to your budget.
- Total your monthly income and monthly expenses. If your results show more income than expenses, you are off to a good start. If you are showing a higher expense than income, it means some changes will have to be made.
- Review your budget on a regular basis to stay on track. Adjust the variable expenses to keep you living within your means.
Analyzing your cash flow can uncover sources of additional savings. One area of additional savings is “The Latte Factor.” David Bach popularized the term to represent small spending habits. The term was derived from latte coffee because daily coffee habits are a prime example of our unconscious spending that usually adds little value to our lives. Think about spending $2 daily over a period of 10 – 20 years vs $5 each day. This small daily spending can add up to large sums over time.
Thoughtfully arranging your spending so that you make the most of your money will help you in the future. Understanding how money moves through your personal financial situation will help you cut back on waste, and help you create a realistic financial future.
The outcome of effective cash flow management and a well-designed financial plan will help you pursue your dreams.
Until next time, cheers!