The Importance of Your Budget and Cash Flow Habits
Like many people whose personal financial picture includes work income, home ownership, bank accounts, credit cards, investment accounts, kids, travel, hobbies, retirement savings, and more, you might find it hard to keep track of every cent that comes in and goes out on daily basis. Tracking and budgeting can seem like a Herculean task on top of everything else, especially if you feel you’re doing “fine” – your income is enough to cover month-by-month expenses without hiccups.
But putting some budgeting habits and tools in place, and keeping track of your cash flow, is a critical step to achieving any long-term financial goals. As financial author Dave Ramsey has said: “a budget is telling your money where to go instead of wondering where it went.”
Starting the Process
Budgeting can feel like “dirty work” – few people like to do it. But the first step in understanding your budget and cash flow is getting all the information down on paper (literally or in digital form). At Butera Wealth Management, we try to make it easier for our clients by providing lists and tools to help people think about and account for all the different types of expenses they have. It’s easy to forgot things; our clients are often surprised to see where all their money is going. These days, however, most banks allow you to access transaction information online and set up electronic bill payments, so you can quickly look back at the last six months or more of your income and expenses to capture everything.
There are also a lot of websites and computer programs that can help streamline the process even more, such as Quicken, Quickbooks, or Mint (just one caution about using Mint, however: disregard the mutual fund suggestions that the program makes, since it doesn’t know your risk tolerance or understand your complete financial picture).
Budgeting vs. Cash Flow
Although closely related and intertwined, the difference between budgeting and cash flow management are:
- Budgeting is the process of identifying your revenues and expenses, and allocating those to the right categories
- Cashflow is projecting out—in time—when revenue and expenses will occur so that you can plan for upcoming expenses and priorities.
Once you understand how your budget is structured, then you can look at how it could be changed to better meet your objectives, for example, by cutting some expenses, saving more, or reallocating. When clients complete the process of documenting their budget, then we look at it with them and often will find additional money that they didn’t see, and which they can be using to better meet short or long-term financial goals.
It’s vital to track your personal cashflow, to ensure that the money you need is there when you need it. This is especially for folks who are coming close to retirement (when your budget and cashflow will likely change from what it is during your working years). There may be expenses you could cut out, or different income structures that will better position you for retirement. For example, discretionary shopping is something that can easily be cut back—most people don’t need more “stuff.”
Even the most sophisticated and financially savvy clients can find they don’t fully understand their budget and what to expect in retirement. The best investment planning in the world will only take you so far if you don’t have accurate budget numbers to work with. Budgeting if often overlooked because it seems “basic”.
For example, one of the biggest financial wild cards as you move into retirement years is health care expenses. Medicare doesn’t cover everything and long-term care costs can escalate quickly. We help our clients run some hypothetical cash flow scenarios to help you select the best options to have a health care safety net in place.
The Power of Cashflow
In business there is a mantra “cash is king”, which applies equally well to personal financial management. Having the cash you need on day to day basis (so you’re not relying on credit or accumulating unnecessary debt) while anticipating future needs is what cash flow management is all about. Our advisors can work with you to ensure you’re positioned to meet short-term cash needs (like a big vacation trip) as well as long-term goals (such as saving for your child’s college education), through the right mix of financial tools and investments.
Most importantly, we can help make sure that your budget and cash plan is resilient enough to withstand surprises, such as stock market fluctuations (pro tip: don’t sell right after a market dip because all you’re doing is locking in your losses. If your portfolio and cash flow is properly balanced, you’ll be fine riding out a lean period until stocks rise again). At Butera Wealth Management, we partner with you to help you pinpoint your cash flow needs and invest in a more efficient way to meet your anticipated needs, now and in the future.
Financial Management Services
The range of budgeting and cash flow planning assistance we provide includes:
- Cash Flow Management: Create and manage your personal income statement.
- Goal Setting: Monitoring your financial progress.
- Major Purchase Assistance: 2nd home, Cars, Weddings, Vacations, etc.
- Liability Management and Mortgage Review: Exploring suitable options.
- Education Planning: Start early for College and/or Private high school.
- Retirement Income Projections: Knowing you can continue your standard of living.
- Social Security Analysis: Determine an appropriate time to start your payments.
- Assisted Living: Planning early is advantageous to decision making and cost.
- Financially Dependent Family Members: Incorporate this into your retirement plan.
- Custom Consulting: Any other issues specific to your planning.
- Personal Website: For financial planning, document storage and aggregation of outside assets.