A personal financial budget/domestic budget refers to allocating your income in a planned way towards the expenses like household, lifestyle, dependents, insurance premium, debt repayment, etc. The surplus is to be kept aside for contingency purpose and future goals. Your Financial Plan reflects your Budget. You need to pen down your Cash Flow and tally both at periodical intervals.
Follow these steps:
- Note your net income (both earned and unearned)
- Track your head wise expenditures
- Maintain both primary & secondary bank accounts
- Identify your goals with time horizon and quantify the goal amounts
- Make a Financial Plan
- Implement the Financial Plan
- Reconsider your spending habits with corrective steps (Control measures)
- Monthly review of your budget & cash flow
Sadly, often estimated domestic budgets are given casual attention by quoting rough estimates. Your approach should be more rigorous to this area.
Budget is one of the backbones of your Financial Plan
As a Financial Planner, I always consider Cash Flow like other significant factors of personal finance and correlate it with Budget. During interviews with my clients, I need to go off-track and undertake more detail research in order to arrive at more accurate cash flow. There may be 20% to 30% or more errors (not uncommon) in the domestic budget. While you furnish inappropriate budget, the consequence is inaccurate outcome. You can never achieve your goals by chance/accident.
On the other hand a Cash Flow statement determines cash in & cash out, i.e. your residual income after your fixed and variable expenses.
Net Cash Flow = Total Income – Total Expenses
Positive cash flow is ideal and you may have surplus cash for savings and investments, repayment/prepayment of loans etc.
Negative cash flow is a situation where the cash outflows during a period are higher than the cash inflows during the same period, i.e. deficit budget and you’re living beyond your means. To bridge the gap, often you may have to take secured or unsecured loan.
Neutral cash flow which hardly you can experience, i.e. what you earn and exactly what you spend in different heads. Therefore you’re ending up with zero, neither you have surplus nor you have deficit in the cash flow.
Once you know whether you have positive or negative cash flow, you can budget by setting your priorities, provided with your limited resources with unlimited requirements.
Chart 1: Positive cash flow
Chart 2: Negative cash flow
Chart 3: Neutral cash flow (Break Even Point)
Budget means your projected income and expenditure during a predefined period and cash flow statement measures your actual cash inflows and outflows in order to show you your net cash flow for a specific period of time. Cash inflows generally include salary, professional/business income, and interest from savings accounts and income from dividends etc.
Once I know whether you have positive or negative cash flow, I can plan accordingly and write action plans (a statement of the steps that need to be implemented to achieve a particular goal/target/objective).
A budget is unlike cash flow. A budget projects both how you allocate your cash flow & keep records and how the cash flow was actually spent at the end of each month. Accordingly, you can notice the difference between the projection (budget) & the actual amount as per your past records (cash flow). Thus you can incorporate your actual income and spending pattern at the beginning of each month.
You must be disciplined. Your rational decisions can make a huge difference, which encourages you by reaching your aspirations. It also helps you to keep you on right track. You need lot of practice to be disciplined.
You may look at if you have two children, acknowledge your investments as your third child. Better not to treat your third child as step. Because your two children may not take care of your financial needs when you need your passive income; but your third child will generate your passive income.
Secondly, I addressed it as “MAGIC OF BUDGET & CASH FLOW.” Why? In the budget, you keep provisions for head wise monthly expenses like household, lifestyle, dependent, loan EMI, insurance premium, savings & investment. If you prudently manage your cash flow as per budget while you reach at old age/approaching stage, you don’t need to keep any provision for savings or investment in your budget. Moreover your accumulated fund will take care to meet all other expenses except savings and investments.
It is important to note that maintaining a budget can influence spending habits. It encourages you to set financial goals and allow you to compare with actual spending patterns. Consequences are you can take necessary actions before things get out of hand.
You need to stimulate your financial status by identifying your loopholes/lacunas. Budget & cash flow play a vital role in your personal fiancé. As you think rationally you do budgeting and act accordingly. You’ll get reward while it reflects in your cash flow and financially you become independent at intended time.
You have both fixed & variable expenses in your cash flow. Variable expenses may not be discretionary (optional expenses) in all heads, i.e. household, lifestyle & dependent. You can cut discretionary expenses (optional expenses) where you can identify.
“Consider your means rather than list of demand.”