Budgeting & Cash Flow
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This document discusses personal budgeting and cash flow analysis. It explains that cash flow analysis is used to understand where money is going, while budgeting is used to control how much money is spent and in what categories. It provides steps for beginning cash flow analysis by tracking all expenditures over time using receipts, bills, and accounting methods. It stresses the importance of thorough categorization of expenditures. The document then discusses creating a budget by using actual expenditure data, projecting fixed costs, income, and savings goals. It suggests finding ways to cut spending by reviewing categories and trends, and setting modest incremental goals. Finally, it emphasizes regularly reviewing and revising budgets.
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Budgeting & Cash Flow
- 1. Personal Budgeting & Cash Flow Analysis
- 2. Budgeting & Cash Flow • Cash flow – When you need to know where money is going – Analysis Cash flow • Budgeting – When you need to Budget control how much and where money is going – Planning & Implementation
- 3. Where to begin: Cash Flow • Determine actual expenditures
- 4. Cash Flow • Determine actual expenditures – Begin with tracking your expenditures • Receipts, Checks, Bills
- 5. Cash Flow • Determine actual expenditures – Begin with tracking your expenditures • Receipts, Checks, Bills • Method of Record keeping required
- 6. Cash Flow • Determine actual expenditures – Begin with tracking your expenditures • Receipts, Checks, Bills • Method of Record keeping required • K.I.S.S. Keep. It. Simple. Stupid.
- 7. Cash Flow • Determine actual expenditures – Use a tool
- 8. Cash Flow
- 9. Cash Flow • Determine actual expenditures – Each expenditure should correspond to a category – Categorize, subcategorize, sub- subcategorize • Be thorough • Be obsessive • Differentiation allows for better budgeting • Limit “misc” category!
- 11. Cash Flow • Don’t Stop! Keep going – Track everything • Including cash – Make adjustments as you go • Computerized tools make this easy
- 12. Budget • Budget is a Spending Plan. • Series of comparisons, preferences, judging, weighing of importance • Subjective decisions, influenced by emotion • Requires honest and frank differentiation between need and want • Ultimately about delayed gratification
- 13. Next Step: Creating a Budget • Have a Budgeting goal or purpose – Cut spending – Save for specific item/event – Find comfort zone for retirement
- 14. Budget • Begin with actual expenditures – rough outline • Project fixed expenditures – Taxes, utilities, debt payments, insurance, etc. • Additional variable expenditures – Everything you can think of not already noted
- 15. Budget • Project Income – Overtime? – Bonuses? – Other sources of income
- 16. Budget • Budgeting Savings 1. Emergency fund • 3 - 6x monthly income 2. Retirement 3. Project fund • Specific goal 4. Play fund • Reward
- 17. Budget • Finding places to cut – Consider everything • few things are truly uncuttable – Obvious places • Dining • Clothing • Entertainment • Luxuries – Look for Red Flags • Spikes in spending • Impulse buying • Begin with modest goals – Eg. Increments of 1% of income
- 18. Budget • Monitor Spending Trends – Use a tool
- 19. Budget Review Revise
- 20. Thank You Schedule your personal consultation now! Visit http://amway.bemanaged.com Contact us at (616) 871-0751 or (888) 738-8780
Editor's Notes
- WelcomeWe’re going to try not to get bogged down in too many details But on this topic the fact is some detail is necessaryPlease stop me to ask questions at any point We will also open up to questions at endIndividual Consultations available More on that at the endNote the 2 parts to topic – Budgeting & Cash Flow AnalysisThese are 2 different things. They go together, but each can be considered individually
- So, what do we mean when we use these terms.Cash flow tells you where your money is actually spentSo you use it when you need to know where your money is goingAnalysis toolBudgeting is a spending planAllows you to control how much and where your money is goingPlanning & Implementation toolWhen you analyze cash flow you come to better understand spending habitsWhen you utilize a budget you are able to overcome poor or destructive spending habitsOne naturally leads to the other. If you analyze your spending habits you will almost automatically come up with areas where the planning and discipline of a budget would help.If you plan your spending you will find it very enlightening and helpful to see where you’re currently spending, the very thing cash flow analysis does.So they go hand in handSo as we take a closer look at these two, we’ll begin with Cash Flow
- Cash flow seems the better place to start because it is the analysis of historical dataCash flow analysis looks at the trail your spending has made.When you begin it may seem at first as if you’re trying to drink from a firehoseHow does one go about finding where ones money is going? You would begin by tracking down and recording each of your transactions
- Back when I started budgeting we used mainly cash and checks, so tracking expenditures was different than today; we relied much more on a physical receipt.But today we use mainly electronic means to pay for goods and services. In fact I rarely carry cash anymore.It is normal to receive a physical receipt but often there is also an electronic record of the transaction as well.So the idea to tracking your money is to make sure you have some copy of all receipts or other transaction documents >>
- And then record them in a central expense log where analysis can later be applied.It’s clear then that some sort of system for keeping record of all expenditures is needed.What you do to keep record is entirely up to you. But it needs to be agreeable to all “spenders” in your family unitFor the longest time we saved receipts, but it was always difficult for the two of us to cooperateSo I have intentionally gone to nearly all electronic transactions for easier record keepingSo find something that works for both of you.
- One word of warning;the life expectancy of your cash flow analysis is inversely proportional to your record keeping’s complexity For those engineers and accountants and others who are detail obsessed, I’m talking to you. The harder you make the system, the less likely you are to stick to itSo keep it simple.
- There are some powerful tools available and since so many of our transactions are electronic anyway, it seems natural to gravitate toward an electronic toolThe point is to take advantage of the resources available to make this part of the work easier.We use one credit card for as many transactions as possible, and those transactions are bought into my on-line bank account. I pay all bills from that on-line bank account, tooAnd of course, checks we write are recorded in that account, and ATM withdrawals for cash are recorded as well. So with that one account and a credit card we cover probably 99% of our transactionsThen we use Mint.com because it has such great monitoring tools and the budgeting piece as well.But there are other tools available too. The idea is to leverage technology to make this part of the work less time consuming
- This is an example from mint.com showing the transactions tab. Mint.com pulls each transaction into the account with the date, description and amountAnd you set up and assign each expenditure to a categoryHerein lies the key to the most effective use of cash flow analysis: categoriesTo have a total for all spending for the month is not nearly as informative and helpful as having that total broken down into many categories and knowing how much is spent in each category>>
- So as you’re setting up your system, each and every expenditure should have a corresponding categoryAnd the more categories and sub-categories you have, the more helpful your data will beSo Be thoroughBe obsessiveDifferentiation allows for better budgetingLimit “misc”, “other”, or “uncategorized” category!
- Example of default categories and sub-categories in mint.comBy breaking your spending down into categories, it will become clear over time exactly where you consistently spend your moneyYou can access this demo account on mint.com and copy their default list of categories if that helps you get an initial start in your system.Once you have your system up and running >>
- Don’t give upTrack everythingIncluding cashMake adjustments as you goComputerized tools make this easy
- Ok, so now that we have a handle on cash flow we’ll switch gears and look at budgetingUnlike cash flow analysis, which requires no emotional choices or judgment A budget is all about using judgment, reason and discipline.Cash flow analysis looks at historical data. A budget is a future plan. A budget is hope in a set of decisions & preferencesA budget can be influenced by emotion, but typically we don’t want that. Like “grocery shopping while hungry” making a budget while in the wrong frame of mind is dangerousThe right frame of mind includes the ability and desire to distinguish between what is really needed and what is only really wantedAnd then delay the purchase of that which is wanted but unaffordable or even unnecessary until a later dateA budget forces us to get serious about delaying our wants – a concept that can be difficult for some
- Implicit in the process of creating a budget is the purpose or goal in doing itSince budgeting is an effort to control how much and on what your money is spent it follows that this control is wanted or needed for a specific reasonMaybe that reason is simply because you need to live within your means, or you want to save for a new car, or you want to make sure you can live comfortably in retirement.Whatever your reason to create a budget, define the reason or goal at the start and keep it in mind through creation and implementation
- Best place to start creating your budget is using cash flow dataBegin with your actual expenditures. That will give you a rough outline to start.Then identify your fixed or ongoing expenditures, such as utilities, mortgage, insurance, property taxes, etc. and add those that are not yet on the listThen identify variable or irregular expenditures and add all you can think of to the listAssign amounts to be spent to these categories based on historical data or future projectionYou will come back and revise this list over time as you remember other areas of spending or add new expenditures you encounterBut this should then give you the bulk of the spending in your budget
- On the income side, project using normal, ordinary income. This will be the money you actually receive in your paycheck – after taxes, deductions and 401k, etc.What to do about other income? We don’t recommend a budget that depends on overtime or bonuses – its just not wise to depend on them to meet your budgetOther sources of income can be used if they are regular and consistent.
- It is important to include savings in your budgetDon’t just save the “left overs”Save intentionally and basically in this order of importance:
- Now inevitably on the first pass your spending will be greater than your income, and you will need to identify places to cut.This is where the judgment and reason, and emotion, come into play.Start by Considering everything: there are truly few things were cuts cant be made. Of course, debt payments are fixed, but all else should be on the tableOften you will find room for cuts in these areas – food, clothing, entertainment, luxuriesYou may also find some red flags that indicate areas that need your attention this might be a rash of spending, say at Christmas, that needs to be better planned or a series of cigar purchases over the internet that indicates a patternYou’re going to want arrive at your ideal budget over a series of modest steps, not all at once choose obtainable goals – 1% of income at a time don’t set yourself up for failure – set yourself up to succeed
- There is no cruise control setting where you set it and forget itYou will need to Monitor your spending to make sure you are on trackAgain, a tool will really help in monitoring. Lots of display optionsNow, a word about mid course correctionsYour budget is not like a checking account. If at mid month you are showing a positive balance in a category this does not mean there is extra money to spend. So Adjust with caution. Any overspending in one category will have to be offset by cuts in another category or additional income
- And then periodically – probably monthly – you will compare your actual cash flow data and revise the budget for the next periodSince so many of our expenditures are on a monthly rhythm it is natural to begin with monthly budgetsAfter some time – when you are familiar with your spending and have it under control you could move to quarterly or semi-annualBut keep at it.