Your Financial Future: Cash Flow and BudgetSubmitted by Alexander Consulting Group, LLC on December 30th, 2021
For the past several months, I have been blogging about Financial Wellness and the six verticals I believe are integral to planning your financial future and reaching financial wellness:
2. Estate Planning
5. Cash Flow and Budget
6. Assistance to Loved Ones
So far, I have covered investment, retirement, and insurance planning in previous blogs. This month I am going to focus on some basic considerations for Cash Flow and Budget.
Income Sources Review
Take a look at the various sources of income for everyone in your household to get a sense of what you have coming in weekly, monthly, and annually. Depending on what phase of life you or other members of your household are in, these sources of income will vary.
Generally, income from a salary or retirement are the most common sources. However, your situation may include other income streams with recurring payments such as alimony, child support, businesses, rental property, settlements, or others.
Gather the income information for all members who are contributing financially to your household and document all sources and the totals.
Expenses and Budget Goal Setting
Taking a look at our expenses is likely a bit more involved. Review your expenses realistically and account for all outgoing payments that are fixed, variable, and periodic. This is the time where you are going to really sit down and have an honest look at your regular and ordinary expenses. Housing, medical, entertainment, education, vehicles, and similar costs may be more obvious. It is important to also account for taxes, savings, investing, retirement, college, and obligations for care of loved ones.
Once you have a handle on your income and expenses, it is time to think about your budget and both short and long-term goal setting. Consider monthly expenditures that are typical for your household and plan for future unknowns. Include everything from something as basic as utilities to emergency funds, insurance, taking care of dependents, vacations, and more.
Nearly everyone is going to carry some type of debt. Depending on our age, the type of debt will vary. When we are younger, we may have a tough time starting out with education and credit card debt. Many things are financed such as vehicles and homes. It is important to understand the implications of the type of interest and the rate for each debt we owe.
Our debt-to-income ratio is an important factor when applying for any type of loan. Most of us have incurred some type of debt, but having a low debt-to-income ratio is the goal. Living within our means helps to keep it within an acceptable range.
When reviewing your regular and ordinary expenses, taking a look at past one-time expenses can help you budget for future one-time expenses. Many of these may be related to your home or vehicle such as an unexpected car repair, a garage door, or maintenance. Anything that is an expense that will only occur once over an extended period of time should be considered when budgeting.
Planned Large Expenses
Other important expenditures to consider when thinking about cash flow and budget planning are the large expenses that we know will occur in the near future. Perhaps you have a major home renovation, new car, elective surgery, wedding, or other planned upcoming event. It is much easier to plan and budget for major expenses when we know they are on the horizon.
There is only one thing we can count on in life and that is that we can’t control everything. No matter how well we plan, life can always throw us a curve ball impacting our finances. As important as it is for us to budget for our known or planned expenses, we also have to think about unplanned expenses.
Perhaps there is an unexpected water leak at your home, your roof needs replaced, flood damage, a major car repair or termites,. If there is anything that the last year has taught us, it is that we need to be better prepared for the unexpected. An emergency savings is there to help us with unforeseen expenses, but it is also accessible if there is a sudden change to income.
Dollar Cost Averaging
Wealth is built by continuously adding money to your investments. Even if the amount is small, investing a set amount of money periodically could have long-term benefits. Some find that setting up automatic deposits to retirement or other savings accounts is an easy way to achieve this.
Understanding the type of mortgage you currently have or may have for a future property can give you a clearer picture of what it will cost to finance the home over time. The interest rate and the length of the loan are the simplest factors to know. Most mortgages are 15 to 30 years.
Over time, interest rates change and that may create an opportunity to refinance your existing loan saving you money. We have been in a period of low mortgage rates for some time and many have been able to take advantage of lowering their mortgage payments through refinancing.
Lines of Credit
We have a basic understanding that carrying a high balance of credit card debt is not desirable. Typically, credit card debt has a high interest rate and it can take many years to pay off debt when only paying minimum payments.
However, credit cards aren’t all negative. There are also positives to having lines of credit. Using credit cards and paying the full balance off each month helps to build our credit score. Having lines of credit helps improve our debt-to-income ratio, which positively impacts our credit score, ability to borrow, and lowers our interest rates.
Having lines of credit available is important when emergencies arise and unexpected costs are imminent. Just understand the financial implications of paying the balance off over time and how it will impact your monthly budget.
If you’d like to consult with an individual financial planner, please contact me. Alexander Consulting’s philosophy is to encourage people to plan for lifelong security: financial, health, and social. We take a highly individualized and zealously researched approach to financial planning so that our clients are fully prepared for all of life’s challenges.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.