Proper cash flow management will make it easy for you to meet your financial goals. Photo: iStockphoto
Mumbai: Have you ever done pest control in your house? Medicine is injected into walls, woodwork and all drains. All gaps that allow pests to get in and out are treated and blocked. If gaps are left unfilled, the pests return. Similarly, in money management, unless you check your expenses and income, you will not be able to move to the next stage of saving and investing. You need to first plug the holes to be able to take stock of your finances. Here is how to do it:
To have a foolproof financial plan in place, you need to first start putting your cash flow system in place. Cash flow management is a report card of your income and expenses.
Step 1: Keep a tab of what you earn
Your income is the amount that comes into your bank account every month in the form of salary if you are a salaried individual. Besides your salary, if you have a bank account, you also get interest income on the amount that lies in your bank account. Then there are dividends, bonus, interest and profits from investments. You need to keep a tab on all the money that comes into your account, however, small the amount may be. This will give you an accurate picture of your income.
Step 2: Check on your spends
Usually, there are three kinds of expenses—fixed, irregular and annual. Fixed expenses can include your monthly rent, equated monthly instalment (EMI) on your car loan or your home loan, utility bills, your child’s school fees, salary for your house help and your transportion costs. Irregular expenses include repair work in the house, eating out, medical expenses and shopping. Under the annual expenses subhead, you will have your medical insurance premium, gifts for birthdays and anniversaries and vacations. “The income is known as a certain amount that comes to the bank account every month. Expenses are where people stub their toe. Most don’t really know what they spend. Once that is estimated, find out the approximate surplus and invest at the beginning of the month. Only after that, start spending,” said Suresh Sadagopan, a Mumbai-based financial planner.
Step 3: Put your income and expenses in order
If you are doing this for the first time, you will find it difficult to analyse it in the first month. You need to give yourself at least six months to analyse your cash flow order. The easiest way to do it is to use an excel sheet. If you don’t like using excel sheet, there are apps that can do it for you. You can download one of the expense management apps and start feeding your expenses realtime. You can also use a notebook to write down your expenses. Once you have collated the data of your earnings and spends, you will get a better picture if you are overspending. You will also be able to see how much money is left with you to invest. Another way to do it is keep aside a ball park figure for expenses and see if you can manage with that amount.
What does this exercise do for you?
This is like setting up the foundation for your financial planning for the rest of your life. Proper cash flow management will make it easy for you to meet your financial goals. Once your cash flow is in order, and you know what your expenses are and how much you can save, you can then start building your savings and investment basket with the right products. Further, you will be able to take complicated money decisions once you have your basic money flow in order.