As a financial advisor, the first place I always start with any new client is their cash flow management. Cash flow management, in the most basic terms, is working out how much money you have coming in each month and how much money you have going out each month.
Many people think they know where their money goes each month but I can actually count on one hand how many people I’ve worked with who knew down to the last dollar exactly how much they spend each month and on what.
But until you know exactly how much you are spending (and on what), you can’t effectively plan for your short, medium and long term goals. You may want to save for a holiday, buy a new car, build your first home or simply start saving more for your retirement. Working out how much you really spend can be a massive eye-opener and help you get on the right track with your financial goals.
Here’s how to work out how much money you’re really spending:
Look At Your Bank Statements
Collect at least a few months of bank statements across all your bank accounts. You can’t use just one or two months of data to determine your regular spending habits. Use at least 4 months (more if you have the time and the inclination) of statements to get a clear picture of where your money is going on a regular basis.
Categorise Your Spending
Now that you have a few months’ worth of statements, you need to break down your spending into different categories. Be as thorough as you can – don’t lump all your household bills into one category – break it up into water, gas, electricity, shire rates, internet, mobile phones, pay TV etc. Make sure you include a category for cash withdrawals too – this is almost impossible to track effectively unless you make a note somewhere each time you draw cash out (which nobody does). Also include categories to cover expenses like eating out, entertainment, clothing/shoes, school expenses if you have children – categorise absolutely everything you are spending.
Add Everything Up
Next you need to add up all the payments you’ve made for each category. Some shouldn’t surprise you at all, for example your internet cost is most likely going to be the same each month. But other costs may well end up shocking you and that’s where the final step comes in.
Identify Where You Can Cut Back
Now comes the fun (or scary!) part. Take a good hard look at exactly how much you are spending on every category of expenses. Are you spending what you really thought you were? Are you seeing the true cost of your daily cappuccino for the first time? Did you realise just how much you were spending on eating out with friends and family? Some expenses are not going to be able to be reduced, for example your shire rates. But look at what you are spending and what costs you can realistically start to reduce or even stop altogether.
Here at Luda Financial Solutions, our financial planners in Joondalup specialise in cash flow management for Perth professionals and families. Get in touch with our friendly team today and find out more about how we can help you budget better and successfully plan your financial future.