Cash Flow and Setting Up a Budget

Every other aspect of your personal finances will stem from how well you balance your income and expenses and consistently budget.  You need to consistently track and evaluate your income and expenses to ensure that you're on the right path. 

Once you have done the tracking: money coming in and money going out, it is time to look at your cash flow to compare your spending to your take-home income (net pay). When you boil budgeting down to its most basic rule, you realize that you need to spend less than you make. It's that simple.  If you find that your analysis of income and expenses results in you spending more than you are earning, you have only two choices: make more or spend less.

Cash flow analysis and budgeting allow you to reduce spending on "wants" that you can do without and then revisit "needs" to make sure that they are essential and valuable to you. Ideally, by doing this, you'll leave a surplus for other financial goals like building up your savings, paying down your debt, or spending on things that matter to you.

 

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Budgeting Methods 

There are several different budgeting methods that you can use to create financial well-being. Regardless of the method you choose, you will need to do all the previous steps discussed in this module.  Assess, Organize, Track, Budget, Evaluate

Here are a few popular budgeting methods:

  • Zero-sum Budget: This method allocates every dollar of income to an expense. (Your income minus your expenses equals zero)
  • 50/50 Budget: This method divides your expenses into two categories of fixed and variable
  • Cash Envelope Budget: This method allows you to keep cash in envelopes for specific expenditures every month
  • Percentage Allocation Budget: This method allows you to break down your monthly net income into typical categories 

Example of a Percentage Allocation Budget 

Before you take a look at the recommended budget allocations, remember that you are your own most important creditor for the rest of your life. You'll never owe money to anyone more important than yourself. Commit to saving and investing 10% of every dollar you ever make starting now! That's why saving is listed as the first budget allocation.

Saving should be at least 10% of your net income
Housing should be no more than 25%-30% of your net income
Meals and eating out should not exceed 15% of your net income
Insurances should not exceed 10%-15% of your net income
Transportation expenses should be about 10%-15% of your net income
Utilities should not exceed 5%-10% of your net income
All other expenses should account for about 20% of your net income
Your total percentages should equal your total net income of 100%

 

 

Spend some time and see how closely your current budget matches these recommended budget allocations. Is there an area where you are spending way more than recommended? Maybe there is an area where you don't spend too much; could you use that extra money in a different category? 

 

 

Learning Checkpoint:

You should all now be ready to start physically constructing your own personal budget. You can do this in any way that works for you. Find an app, create a spreadsheet, or pull out some paper and a calculator.