Many people start each year with reflecting upon the past year and making goals/plans for the New Year. A common resolution that makes the list for those that follow this annual ritual is some form of ‘Follow a Budget’ to get a handle on cash flows.
Here comes the shocking declaration from the financial services professional: Budgets in their traditional form usually do not work, so don’t bother with one.
I’ve not gone crazy. Please share a few more minutes of your time so I can explain. Here’s why setting a goal to “Follow a Budget” might fail:
- It is PARENTAL - The act of writing ‘Follow a Budget’ is a tactical PARENTAL order that you are giving to yourself. The vestiges of teenage rebellion are likely already welling up inside of you as thoughts of being limited or constrained in some way enter your mind.
- Monthly budgeting only works until the first unplanned expense – To borrow from our military, every war plan becomes outdated once the first shot is fired. Same is true with monthly expenses. For example: My daughter falling off a piece of playground equipment and generating a $400 bill from the emergency room wasn’t in my monthly budget for October 2015 (she’s OK by the way). Mentally, events like this can be deflating and cause your commitment to the budget initiative to waver.
- Monthly spending is driven by your lifestyle habits – Your lifestyle habits have been developed over many years. It is not realistic to complete a drastic overhaul inside of 12 months.
Simply put, increasing your savings percentage is a matter of reviewing ingrained habits that you wish to redirect towards a more favorable result. The way to increase savings is to find a system that works for you and the way you think and process information. It all starts with a deep understanding of your cash flows and then developing a system that works for you.
Here are seven easy tips you can employ:
- Study your household cash flows for the past 90-days – Don’t track your expenses for the next 90-days because your brain will automatically adjust your spending because you are now paying attention. Get a true snapshot by downloading 90-days of transactions from your checking account, credit card account, checkbook, etc. Then, sort the data by category (grocery, dining out, household items, gifts, etc).
- Break out expenses by fixed and variable – Fixed expenses are things that do not change from month to month. We still record them because they are expenses, but we do not have to think about them too much because they don’t change. VARIABLE expenses however change frequently and is the place where most cash flow problems start. The most common areas where people can look to save money are: grocery, dining out and household items (i.e. Amazon, Walmart, Target, Costco, or any store one might be tempted to spend money on impulse).
- Calculate your monthly cash flow surplus and have the surplus automatically deposited into an account that is not your general spending checking account – Pulling this money off the top will keep your checking account balance aligned with expected expenses. By pulling the extra money out automatically, you will force your brain to make decisions based upon what is in your checking account. When there is extra money, the brain will tell you that it is OK to splurge and buy the mini deep fryer and the entire Hunger Games movie trilogy at checkout.
- John, in #3 what is this ‘monthly cash flow surplus’ that you referenced? – If this is your reaction to #3, then you needed to complete this valuable exercise. The next step is to understand why you do not have a monthly cash flow surplus. The answer may be that you are living beyond your means. Look then to the areas that you can adjust (the variable expenses). If you are still in a deficit, then more drastic measures may need to be considered.
- When revenues increase (raises/bonuses from jobs), make a conscious decision to spend some and save some – Your family has to decide the best way to allocate your resources. A bad choice is to allow 10-20% of your annual income to be deposited into your general spending account only to get slowly frittered away over the course of a year.
- Treat each and every dollar as a precious resource – Consider for a moment the hypothetical scenario that you received every dollar that you’d ever earn at the age of 18. You aren’t allowed to have any more money (you can’t earn more, you cannot be given more, etc). This money has to last you for THE REST OF YOUR LIFE. Knowing what you know now about money and life, how would you spend that money? Would you be more careful or less careful? The fact of the matter is, economically, this is you today except that you don’t get the money all at once. Every dollar is a precious resource because once it is given to the IRS, spent or lost – it is never coming back. What also is never coming back is the money potentially gained by investing it or potential interest earned over your lifetime. Treat every dollar as a precious resource!
- Repeat this process two to four times each year – Life is busy. When we get busy, our brains seek out convenience and our ingrained habits will tend to override our new cash flow management plan.
For more information or for help developing your own cash flow management plan, please contact John by visiting http://www.cranefinancial.com or email John at firstname.lastname@example.org for a complimentary discussion about the contents of this article.