To successfully navigate the complexities of modern finance, it is essential to grasp the basics of budgeting & cash flow management. This series seeks not just to offer you piecemeal financial information, but a broad roadmap to the diverse labyrinth of personal finance from a Christian perspective.

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Cash flow management lies at the heart of every financial plan. Whether you are a multi-millionaire or struggle to pay your bills every month, you need to keep your finances in balance. Otherwise, the consequences can be painful.

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Budgeting and cash flow management aren’t about restricting how you spend your money or spoiling the fun. Rather they keep you away from all the trouble that comes from letting your finances get out of hand.

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At their core, they serve to keep your finances on an even keel.

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Here’s a complete guide to help you create a budget and put your finances in order.

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The Consequences of Poor Cash Flow Management

When our finances are off-balance, we get stuck with difficult choices every time significant expenses come up. Our stomachs don’t wait until the next paycheck. Neither does the landlord or the bank. Major life milestones don’t wait either.

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Without enough cash in the bank, we have little choice but to borrow. We turn to credit cards, overdrafts or personal loans. These attract huge interest, which snowball due to compounding.

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Now, instead of just paying for groceries and making the mortgage or rental payments, we have to make payments towards our debts and the interest on top of them. Our tight financial situation is stretched even further. We start to lose sleep over whether we will be able to put food on the table, or if we will be kicked out of the house.

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This state of financial anxiety distracts us from other important things in life. And if we do manage to repay the debts, we end up paying substantially more than we bargained for.

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Budgeting & Personal Cash Flow Management

Good cash flow management allows us to build assets, reduce liabilities, and increase our net worth. It typically involves keeping our discretionary expenses under control, and includes proper management of loans and responsible use of credit.

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The idea behind cash flow management is simple. Don’t spend in excess of what you can afford.

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It can be as simple as counting every dollar you spend and scrimping on everything. Or you can keep a record of every single expenditure we make, so that you do not accidentally overspend. But these techniques have numerous drawbacks. They can be inconvenient and restrictive.

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Most of us aren’t happy with an approach which involves cutting back on everything. We want to pamper ourselves every now and then. We want to go for holidays. At the same time, we need to keep our cash flow in check.

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Budgeting

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Many methods of budgeting exist. Prominent models include 50-30-20 Budgeting, Envelop Budgeting, Zero-Based Budgeting, Reverse Budgeting and 80-20 Budgeting. They differ in complexity, robustness and ease of execution.

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Step 1 – Understand Your Limits of Affordability

The amount of money you have available to spend on yourself and your family, or to give away, is determined by your income. For simplicity, income is typically aggregated on a monthly basis.

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But before you spend a single cent, you may be required to pay taxes or contribute to a retirement scheme. These are deducted from your gross income, leaving you with a reduced net income to allocate towards various important functions.

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Calculate your net income by deducting taxes and compulsory retirement scheme contributions from your gross income. This represents your limits of affordability. It is the line you have to toe in order to keep your finances in balance.

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Step 2 – Apportion Your Funds between Future and Ongoing Expenses

The money we earn goes towards sustaining ourselves from day-to-day, paying for our needs which include groceries, housing, transport, utilities and child care. Because we have to make these expenditures on a regular basis, they are also known as fixed expenses.

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Then there are our wants which serve to spice up our lives. These include watching a movie in the cinema, or buying the latest gadgets. Because there is flexibility in cutting back on such expenditures, they are known as variable expenses.

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On top of that, we have needs and wants that lie in the future. For example, you may plan to head overseas for a holiday at the end of the year. All of us, if God is willing, will retire if we live till a ripe old age. To achieve these goals, we have to diligently set aside a sum of money for future use. This amount will also go towards building up your emergency fund, creating a buffer in case you fall into hard times in the uncertain future.

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After you have worked out your net income, your task at this stage is to allocate your funds appropriately across ongoing and future expenses.

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The multiplicity of expenses makes it difficult to wrap our heads around the entire process. This is where various budgeting methods offer guidance. They simplify the process by splitting expenses into different budget categories. Some delve into detailed calculations to yield precise figures to allocate towards various expenses. Others utilize general rules of thumb to make the process simpler. Some require effective personal budget management skills; others employ simple budgeting techniques that are suitable for beginners.

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Here’s a personal budgeting tip for beginners: the key is to choose an approach that suits you.

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Numerous aids are available to help you through this process, including budgeting spreadsheets, calculators, personal budget worksheets, and budget management apps. If professional assistance is required, you may consider engaging the help of a financial planner.

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Step 3 – Stick to Your Budget

Once you have created your budget, the most important thing is to stick to it. Budgeting works only if you follow through, and fail if you don’t.

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To make your budget work, it is important that you have a clear purpose in mind and avoid unrealistic expectations. If you set up a budget you can’t stick to or have no reason to stick to, you will eventually lose heart and stop following the plan.

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If socialising with your buddies is important to you, be sure to set aside sufficient funds to allow you to enjoy going out for meals with them. Cutting back slightly by choosing the cheapest item on the menu is tolerable, but making a deep cut that requires you to forego spending time with your friends may lead you to abandon the budget entirely if there is no good reason for sticking to it.

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Moreover, it will be frustrating to consistently under-allocate funds only to have to keep making adjustments along the way.

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This goes for your choice of budgeting method as well. Whichever your choice, the most important consideration is that it has to work for you. It has to be something that you can stick to day in day out.

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Step 4 – Refine Your Budget as Life Circumstances Change

Your budget can become outdated as life circumstances change, especially when there are significant changes. If you used to live with your parents who took care of your daily necessities, moving out means taking care of these necessities yourself. With the added financial burden, your budget that worked well previously may not work any longer.

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Whenever there is a change significant change in your life circumstance, be sure to go through steps 1 to 3 again.

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Loan Management

For one, some of these are necessities. The functions of shelter and transport must be fulfilled in one way or another. Hence, if we do not buy, we must rent. Over the long run, buying tends to be cheaper than renting. This makes taking up loans to fund a purchase a potentially wise choice if done prudently.

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Loans come with different types of interest such as fixed, variable, flat, nominal, effective. Very often, sales people use whichever term is most advantageous to them to make the interest rate appear low. It is important to understand what these terms mean, and their translation into dollar terms, so that you avoid choosing a loan that is disadvantageous.

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Loans also come with a repayment schedule. Miss a payment, and you can be slapped with expensive late payment charges.

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Good cash flow management ensures that sufficient money is set aside to make these payments, and that these payments are made on time. Automation is a good way to ensure punctuality.

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Responsible Use of Credit

While credit provides a convenient source of liquidity, it is a double-edged sword. Even with a balanced budget, irresponsible use of credit can wreck your finances.

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Being unsecured and without a fixed repayment duration, credit is one of the most expensive forms of debt. If you could enjoy the kind of interest rates charged by credit card companies, you could work for 5 years and retire.

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And the terms are unforgiving. Missing a payment can result in expensive late payment charges. Fail to settle all outstanding balances in full, and every purchase you make from now on attracts interest immediately, up till the day you reduce the outstanding balance to 0.

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Here’s an important tip on how to save money: if you utilize credit, be sure to make your payments in full and on time. Otherwise, it will be far more advantageous to use debit cards instead, or cold hard cash.

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Learn More

We believe that cash flow management allows you to do much more than just keep your finances above water. It lays the groundwork for financial freedom. To learn a more, attend our Workshop, visit our Facebook page or obtain a copy of The Financial Machine (to be released in June 2020).