Personal budgeting is often done in a very haphazard way. If there is a plan, it’s usually a reconciliation-based one. This means that all expenses are accounted for “after-the-fact.” This makes planning for the future impossible.
Business could never operate this way because they must be forward-looking. This is especially true of publicly-traded companies. If you want to strengthen your financial position, consider ditching the way you do budgeting now, and adopting a cash-flow plan.
How To Establish A Cash-Flow Plan
First, you have to know how much money you’re spending right now. Add up all of your current expenses. Don’t forget to include expenses that you may only pay once or twice a year. Any pre-paid expenses are easy to forget, so dig through your old bank statements for the last 12 months to uncover any reoccurring expenses you may have forgotten about.
Now, calculate your total income. This can be done by adding up all of your paychecks for the month and multiplying that number by 12. This gives you a yearly income estimate.
To make a cash-flow plan, you have to spend less than you make but organize your finances so that you can plan for your future. You do this by averaging out your income and expenses over 12 months. By doing this, you create a fixed monthly dollar amount for everything you make and everything you spend.
This is especially helpful for variable expenses, since variable expenses are, by nature, somewhat unpredictable. If you have monthly expenses that change from one month to the next, establishing an average expense amount over a 12 month period will help you to get a better idea of how much that variable expenses really costs you on a per-month basis.
For example, let’s say that you have an expense that is:
$12 in month 1
$20 in month 2
$15 in month 3
$14 in month 4
$17 in month 5
$18 in month 6
$27 in month 7
$50 in month 8
$75 in month 9
$50 in month 10
$35 in month 11
$30 in month 12
You would add up all of these expenses over a period of 12 months (you will need to add up the previous 12 months to give you an idea of what any given variable expense ought to be going forward). Then, you would average those expenses out over the same 12 month period. In this example, you would find that your average for this expense over 12 months is just $30.
Regardless of what your actual income and expenses are for any given month, you operate on the projected income and expense plan you set up. In this example, you would budget out $30 for this expense, even if the actual bill came out to be less than that amount. Of course, you only pay whatever you actually owe. Any excess money is saved.
This allows you to build up a surplus for months when the expense is higher than the average. This strategy solves the problem of budgeting for those expenses that you only pay once or twice a year. It also allows you to have additional savings in months where you may receive fewer paychecks than you normally would.
A good cash-flow plan will prevent you from scrambling around at the last minute trying to figure out how to pay for a particular expense. Averaging your income and expenses out over 12 months allows you to see spending and income trends long before any shortages become a reality. This is the secret behind a business’s cash-flow method of budgeting. Not only does it make it easier to stick to a budget, it eliminates nasty financial surprises.
Post contributed by Elizabeth Goldman on behalf of https://www.wonga.ca .
Elizabeth Goldman is an experienced financial writer who contributes regularly to a range of financial sites on her specialized field of personal finance and investment topics.