I think we can all agree that many factors go into our decisions around how we steward (make, spend, save, and invest) our money. A lot of it is tied to our emotions and how we are experiencing the world around us. And that is often the first lynchpin in the financial planning process – how can we make sure that we align our emotions and values with a healthy financial plan?
Step One: Awareness of our Cash Flow
Oddly enough, I’ve learned that the more money we have, the harder it is to stick to a budget. Why? Because when we have access to a lot of money, we don’t run out. We can just keep right on tapping that plastic card, and there’s nothing to stop us.
However, managing our cash flow is one thing that can get us into considerable trouble if left unattended. Like a small leak under the sink or a funny rattling under the hood of your car, the longer we go without getting a check-up, the more it will cost us to correct the mistake.
Let me illustrate my point with an embarrassing story about spending…
Recently, my husband and I were working on a family budget. When we sat down to put the numbers together, I asked him how much he thought we spent on “entertainment”. Entertainment includes movies, take-out, visits to the local ice cream shop, and the LCBO.
Since the pandemic began, our entertainment expenses have been limited. We’re mostly down to the odd take-out meal and trips to the LCBO. Nothing major, really. $25 here, $15 there. We estimated our entertainment expenses to be around $150 for the month.
Well, I’ve been around the block long enough to know that when it comes to budgeting and cash flow, the “proof is in the pudding.” In other words, the numbers you pull out of your head when doing an exercise like this are just that, air. The REAL work comes when you compare the numbers you THINK you’re spending to the ACTUAL amounts you’ve spent.
I dutifully printed off last month’s statement from my online banking and went about verifying my numbers.
Now, keep in mind that my husband and I both take an occasional trip to the LCBO. He’ll pick up a six-pack after work; I’ll pick up a bottle of wine on occasion. So when I did our spending analysis, I did not expect to see the number of visits that I saw. HOLY COW! When I added it all up, it totaled over $400, more than double what we thought it was!
So how did that happen? Obviously, we had no idea that our occasional LCBO visits amounted to a big part of our entertainment budget!
It’s so easy to lose track of our spending when we dismiss our purchases as “little” or “insignificant” and when one hand doesn’t know what the other one is doing. Unfortunately, neither one of us was aware that we were overspending.
Lesson learned.
Since that realization, we’ve decided to budget our entertainment and go back to the envelope method (or jar if you prefer). We have a little envelope of cash for our LCBO spending, and when the money is gone, that’s all she wrote.
Without the awareness that came from going through the exercise, we would have continued overspending. If that had happened, there would have been less leftover in December when it was time to top up the kids’ RESPs. Then we would have had to take that money from our line of credit and pay interest on it as we paid it back. Not an ideal situation.
Rough Waters Ahead
Managing our cash flow and our budgets will get even more challenging. Higher gas and food prices have already impacted our lives, and if you haven’t done a cash flow check recently, maybe now is the time. Inflation is real, and it’s likely to continue. We also know that interest rates will go up, and probably faster than we thought. This will impact the amount of interest we’re paying for loans, lines of credit and variable-rate mortgages – all impacting our cash flow.
It doesn’t matter if it is your personal finances or your business; if you aren’t checking your actual results against your projected budget, then you can’t identify the areas where you are going off course and make the adjustments that need to be made to meet your goals. Then it will always be a mystery when you get to the end of the month and all of the cash is gone.
Now, one thing you should know about me is that I really don’t like pointing out problems without also offering a solution. I also have a real passion for planning and organization. So, let’s talk about actionable steps that you can take to raise your awareness and get on the right track.
Step 1: Block off some time to work on it
It doesn’t have to be a lot of time, start with a half-hour. Block it out in your calendar, and don’t let anything distract you. Spend that half-hour writing down all the money coming in and out of your life. All of it. We’re just estimating in step one, so pull those numbers out of the air, if necessary. If a half-hour feels daunting, start with 10 minutes. When your session is up, book another ten minutes in your calendar. And so on.
Step 2: Separate your expenses into two categories
The two categories to use are “fixed / committed” (you can’t change it easily) and “variable / spendable”. When it comes to starting to cut costs, it’s your variable expenses you will look at first.
Step 3: Review your estimates against your ACTUAL
All of the planning you do doesn’t mean a lot if you aren’t making sure that you are following all of your own rules. That is why the envelope method works so well for personal finances. This step can take a little longer, but it is where the rubber meets the road. Print off or download those bank statements and make sure you are within range of what you thought. For anyone who has any “ah-ha!” moments at this stage, I’d love to hear about it!!
Step 4: Think deeply about what needs to be adjusted and how to make that happen
This part can be tricky and you may want to enlist the help of a financial advisor if you get stuck. At this stage, we want to look at two areas in particular:
- Am I overspending?
- Am I saving enough?
Cash flow management is the key; it’s the beginning, middle, and end of your financial plan. First, you need to ask yourself, am I making the right decisions with my money today to help me reach my financial goals in the short, medium, and long term? That’s how we take the temperature and measure how we’re doing. If you aren’t sure where you stand, it’s time to reach out to us for a review.
Step 5: Adjust and repeat
The best part about this process is that you get to make corrections quickly. When you are on top of your cash flow, you can easily see what is happening and make the adjustments you need to stay on track.
Effective cash flow management is an elusive, ever-moving target. The more awareness we have about what influences our decisions around our money stewardship habits, and the more information (data) we have to back that up, the better positioned we will be to achieve financial peace of mind.
Even though cash flow planning can sometimes seem tedious and painful, it’s ALWAYS better to know where you are and what’s happening. Eventually, you will even get excited when you find out that you’ve overspent because you’ll catch it before it gets away from you! And then, you’ll pat yourself on the back, say, “well done, smartypants!” and celebrate.
