by Che Durran
Cash Flow Experience
My first experience with saving money was the CommBank Dollarmite accounts. Although I got to put my pocket money into safe keeping, it didn’t teach me a great deal around how to effectively save my money. In trying to save up for expenses such as holidays or cars I would find out how much I can save each pay period to put towards my goal, this was an effective strategy for the short term but as I began to save for a house this was not going to suffice.
My answer was a budget, however rough it may have been initially. This allowed me to see how much of my pay I can tuck away each fortnight so that it won’t impact my day-to-day. Budgeting doesn’t just allow me to see how much I can spend at a particular time; it enables me to make smarter decisions around investing and around my super contributions. However tedious it does seem each time I have sat down to complete my budget, it has always resulted in me being able to make a more informed decision than what I made last time.
Regardless of a household’s cash position being good or poor, I would encourage everyone to have some form of a budget to ensure you have an idea of money that is coming in versus money that is going out.
Below is an outline of how to complete an effective budget that can be used to assist anyone.
Effective Cash Flow
In establishing a good cashflow, we need an idea of current requirements, what do we need to live on?
Cashflow is determined by income and expenses which then shows if you will have a surplus or a shortfall of cash.
Benefits of completing a budget
- Budgets enable individuals and households to make informed financial decisions and track progress towards goals.
- A budget and cashflow analysis is the building block to someone’s financial situation and unlocks the ability to participate in other areas such as super contributions, starting to invest and save for first home purchase or insuring ourselves from illness or injury.
Negatives of completing a budget
- Completing a budget can be time consuming, however this is up to the individual as you can chose to dig into the fine detail, ie “I spent $150 this week on groceries, $175 last week and then the $160 the week prior”. Or “I spend roughly $160 per week on groceries so apportion that across the year”.
Budgeting can be confronting for some. People can tend to get stressed looking through bank statements and seeing how much they are actually spending. This only highlights the importance of budgeting and creating clarity between the individual and their bank account.
What is the household income?
Household income is made of up employment income, rental income, distribution income and other types of revenue derived from employment or assets.
What do you HAVE to spend? (non-discretionary spending)
Most of what we spend our income on are things that we need such as rent, mortgage or other loan repayments. Obviously, we all need food, water, and other utilities to survive as well. Non-discretional items are those that we must purchase in order to live our lives, we do have a say on what food we purchase and which electricity provider to use to potentially reduce these costs but all of us will pay these bills regularly as it is just the ‘cost to live’.
What do you WANT to spend? (discretionary spending)
Discretionary spending is what we all chose to spend our hard earned income on, the things that we enjoy. A morning coffee before we head into work, pizza night with the kids on Friday and heading away for a holiday all encompass discretionary spending.
What is my net cashflow?
Cashflow put simply is money in vs. money out. There are two ways to improve a household cashflow, to either have more money coming in (earning a greater income, working second job) or to have less expenses (cutting on discretionary spending).
Example
A couple earn income of $80,000 and $95,000 after tax but need help managing their ongoing cashflow as they don’t necessarily understand where they are spending their money. The couple have decided to complete a budget to see what they are currently doing, and also how they can improve their cashflow ongoing.
HOUSEHOLD INCOME
The couple calculate that their income equates to $3,365 per week coming into their bank accounts. They have these funds paid into their joint account each week.
NON-DISCRETIONARY COSTS
Working through the budget, they conclude that they are spending $2,250 approximately per week on items such as groceries, utilities, and their mortgage. Leaving around $1,115 per week for discretionary use. They have decided also to direct debit as many of their bills as possible so that the funds leave as required.
DISCRETIONARY COSTS
Going through their budget and previous bank statement they realise that they have been spending more on discretionary items such as take out food and gifts than they had wished to be doing. In budgeting how much per week they wish to spend at their discretion, the couple realised that they only spend $600 per week between the two of them. They decide to ‘pay themselves’ a wage to a separate account which enables them atm/tap and pay access to facilitate the purchase of their discretionary items.
CASHFLOW
After calculating how much they earn, what they must spend and what they wish to spend, the couple has found that they have a surplus of $515 per week. The individuals now have the freedom to make informed financial decisions based upon better knowledge of their cashflow. This gives them the ability to turn their surplus cashflow into an investment portfolio to try to generate capital growth for potential future expenditure or generate income later down the track. They may also wish to have these funds remain in their offset account to assist in reducing the interest cost of their mortgage. There is now a number of different decisions and outcomes that the couple could seek with the assistance of preparing their budget.
This blog contains information that is general in nature. It does not take into account the objectives,
financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
If you decide to purchase or vary a financial product, your financial adviser, AMP and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.
PB Financial Solutions Pty Ltd ABN 67 097 381 523 – trading as Burke Britton Financial Partners & Securelife Financial Solutions is an authorised representative and credit representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.
