One of the most challenging aspects of getting started with a financial plan is the idea of accountability and change in behavior. Busy lifestyles and poor habits leave little time for us to properly manage our hard-earned money. It often becomes a cycle of addressing problems as they arise, and otherwise sinking into an out of sight, out of mind mindset.
For some, the idea of managing money is that it is an unnecessary task, as long as there is money in the bank. The truth of the matter is you can get away with not having a spending plan for your money—simply do not allow your spending to exceed your income. It really is that simple. However, the point of this is to do more than simply get by. It is about getting to the next level financially, and in order to accomplish this task, you absolutely have to start by completing a cash flow awareness exercise. It truly is not possible without it.
You have to know two things in order to make progress with anything you are doing:
- You have to know where you are
- You have to know where you are going
The reality for most people is that money seems to come into our lives, but quickly leaves month after month and year after year, and people have little understanding of where the money goes and how it is spent. It does not have to be that way, and you do not need an accounting degree or a sick fascination with numbers and spreadsheets to track your cash flow.
The purpose behind cash flow awareness is not to make ends meet, but rather to properly organize your money, which allows you to create wealth, and avoid debt. It is a fairly straightforward process, which need not take a lot of time if you follow a few basic steps and be able to answer questions like these at the end of a year:
- How much income did you earn?
- How much in taxes did you pay?
- How much money did you save in government plans?
- How much money did you save in non-qualified accounts?
- How much money did you spend on reoccurring expenses?
- How much money did you spend on big-ticket purchases?
- How much profit did you make?
Being able to answer these questions may require you to change how you have always done things, but it can make a difference in how you think about your money.
Once you have this information, you will begin to see that your planned spending ties directly into your goals, which is the next step.
In order to have a properly organized budget, you have to identify chronologically the purpose of the money you have, and understand how and when you plan to use it. It is good ideas to take some time and begin writing out your short-term goals, which may include anything you need money for within the next two to five years. This should include money designated for emergencies, home repairs, furniture, or a new car. The defining purpose of this money would be categorized as money you will spend.
Once you have a very clear outline of your short-term needs, take your vision a little further down the road and begin thinking about your medium-term goals. This would include anything you want money for within a time frame of roughly five to twenty years, or leading up to retirement. This should include things such as a new home or financing a child’s education, perhaps taking a dream vacation, or starting the business you have always wanted to open. The defining purpose of this money would also be categorized as money you will spend.
Finally, list your long-term goals. This would include such things as retirement. This is often a category where you acknowledge that the purpose of the money is for income generation and will be used to support your living expenses and other budgetary needs.
The purpose of this process is to help you visualize and define what you want to accomplish, and when you will need your money. It is a chronological road map for your finances and will serve as a compass when organizing your budget.
When making a purchase or investment decision, referring to this plan will assist you in recognizing what is most suitable.
If you have a question let me know. I receive a lot of money related questions and do my best to answer questions within 24 hours or so.
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. Kalos Capital, Inc. does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.