Budgeting Tool #2: The Cash Flow Analysis
Previous Budget Posts for background:
Budgeting Credit and Debt I
Budgeting Credit and Debt II
Budgeting Tool #1: Monthly Budget Tracking and Budget Summary
Budgets: Putting it on Paper, Defining Priorities, and Doing what it Takes
If your month-to-month budget is tight or you do not have available cash designated to cover occasional budget shortfalls, you run the risk of falling into debt, even if your monthly income exceeds your monthly expenses (which hopefully is the case). To avoid this possibility, you need to ensure that your cash inflows and your cash outflows are timed properly. I like to call this budgeting tool the "Cash Flow Analysis."
As always, while good old fashioned paper and pencil works, a simple electronic spreadsheet is much less tedious, reduces errors, and makes monthly upkeeping a breeze. Just like exercise, it is easier to maintain good habits when you don't have to start from scratch. So, while the initial programming takes time, once the spreadsheet is designed, maintenance is as easy as brushing your teeth.
The Cash Flow Analysis contains column, just like a check register. There is a column for the date, description of transaction, debit (outflow/expense), credit (inflow/income), and balance. However, by maintaining the analysis in electronic form, the user can easily engage in cash flow planning in order to avoid, or at least minimize, extraneous expenses such as late fees, penalties, and interest.
To get started:
1. Design you spreadsheet columns and program your spreadsheet to calculate the balance automatically. Because you do not want to fall into the "red, " I recommend putting negative amounts in red.
2. Gather a list of pay dates and dates that your bills are due. I highly recommend performing an analysis for the upcoming three months or longer.
3. Record all the dates and amounts of the paychecks that you can count on, as well as the dates and amount of expenses that are due. Income that you cannot count on should not be recorded until it is received. Bills that vary from month to month (e.g. credit cards) should be estimated in advance, and you should do your best to stick to that budget. The finalized amount can be recorded when received.
4. At this point your balance column should give you a good indication of your day-to-day cash position. If you are in the black at all times, congratulations. If your analysis shows points that you will be falling into the red at some point, you will need to make adjustments. By looking at a few months at one time, you will probably see certain patterns and should look to adjust those patterns. (So, read on).
5. (!) Work on building a cushion into your budget in order to set aside available cash. A more sound, permanent solution is always is preferable to temporary solutions that are often bad or worse.
6. Request or negotiate billing cycles, payment schedules, or payment due dates that are more favorable to you--where halachically allowed. (E.g., if your credit card bill comes due on the 5th, and you find it difficult to pay in full because your mortgage and tuition payments are due on the 1st, request a later, more favorable billing cycle).
7. Anticipate future expenses, get organized, and plan your spending around your cash flow. (E.g., If Pesach or Sukkot throw you for a loop because that much cash is not available all at once, consider spreading out your expenditures out over the preceding months by buying and freezing meats, looking for clothing sales in advance, etc.)
8. Make sure that there are no surprises by regularily monitoring your checking account balance and updating it in your spreadsheet. Communicate to ensure that those who use the checking account know what they can spend from the account and when.
Please add your tips in the comments. I hope to add a debt management post which looks at ways to cut down on interest paid and tackling debt.
And, like I said before, if cash flow is an issue, make a plan to tackle the problem by building up an available cash resource, rather than living with the nightmare that it causes. This is a budgeting tool that is better off left unused.
Monday, December 25, 2006
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Greatly outlined, and so logical - - though so many of us don't always do what's logical, at least not the first time around. I'm fortunate to be married to someone who understands all of this stuff way better than I do, and shares my conservative tendencies vis a vis spending.
The way you spell it all out is a great primer for anyone getting started on budgeting and tracking their spending. Might I suggest your writing a mini-curriculum on frum budgeting that is taught and disseminated during Choson-Kallah classes?
raggedy mom, I included one of Sephardi Lady's excellent budget series as the Money Matters article in the winter issue of Kallah Magazine.
This one is right on target again. When it comes to debt, an ounce of prevention is worth thousand of dollars in interest and penalties later.
If you are fortunate to own a home with any amount of equity a great budgeting tool is a home equity line of credit. In my case it is with Citibank and was free of startup fees (you have to open with a hefty initial loan but you can pay it off the day after the account opens!) and is linked online to my regular checking account.
As needed I can transfer funds from the equity line to checking and back. This is ideal to handle a cash flow crunch. The rates are much better than credit card rates, the interest is tax deductible and you can repay instantly.
Responding two years later: I always recommend relying on debt. The cash flow analysis's purpose is to avoid using credit.
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