Have you ever gotten to the end of the month and wondered where all your money has gone?
One of the primary steps to becoming financially secure is to gain an understanding of your cash flow and set yourself a budget. To begin you should understand where you stand now and visualize where you want to be financially in the future. There’s no point in setting out on a journey if you don’t know where you're going. Creating a cash flow budget is not always easy, it can take some time, but if you take it step by step you’ll be able to create a functional budget and use it as a road map to your financial goals.
The first step you need to take is to calculate all your money coming in. Then tally up all the money that you spend. These two numbers will give you your net cash flow.
Total Income - Total Expenses = Net Cash Flow
Ideally, you need to have a positive cash flow. This means there is money left over to be saved, invested, or can even be used to treat yourself. If you end up with a negative cash flow, it’s an indication that you are living beyond your means and are incurring debt. This is a dangerous place to be, and can be difficult to free yourself from if the negative cash flow continues. The only way to get out is to assess your spending habits and make proper adjustments.
Cash flow management really comes down to understanding the different components that make up your financial picture and acting accordingly. Once your cash flow has been established you can turn that information into a budget. This next part is easiest if you categorize your spending. Start by identifying your components of income-things like your paycheck or investment sources.
Then list the components of your spending; there are different categories of spending that will help you to determine all of your expenses.
Fixed and periodic expenses are things you must pay each month like your rent/mortgage, loan payments, recurring bills, and payments like utilities, cell phones, or memberships.
Variable, or discretionary expenses are the things we have more control over like groceries, eating out, retail/online shopping, vacations, etc.
The final component of your budget is savings. The better you are at managing the other categories, the more money you will have to save. Money saved and invested allows you to grow your money, which results in more financial security.
Designate the amount needed to cover each category, and stick to it. By cutting back on discretionary spending you can turn your financial course around. If you have a negative cash flow this is where you will really start to see a difference.
Maintaining a budget will help you when making financial decisions and gives you set parameters to live within. It’s a good idea to revisit and assess your budget at least quarterly. This allows you to stay on track and make course corrections when needed. Remember, budgeting is an ongoing, active process.
When in doubt don’t hesitate to ask for help with your finances. It’s always better to be certain that you understand than to have a mistake snowball into a larger problem. If you have financial questions we’d love to hear them. Send your questions to firstname.lastname@example.org and we will write up a post to answer them!
“It’s not what you buy. It’s how much you pay for it.”
-Carl Icahn pg.36 The Maxims of Wall Street by Mark Skousen