Personal finance means analyzing various sources of incomes & expenses making sure there’s enough saving for different goals in future. There’s several factors associated with managing cashflow in person finance. Cash flow is main point of whole personal finance. Time & the amount of income spent as income is critical to maintain that there’s proper balance between two.
Even slight miscalculation in cash flow management can result in accumulation of debt which is costly for individuals. Debt also comes with extra interest outgo which affects your savings further. There must be adequate income coming in at all points of time.So you can use your savings. Mismanagement in cashflow can be a headache for owner of family. It can disrupt normal flow of life and peace which becomes a crucial factor to consider. This can also cause health problems.
Important key points
1. Understand cashflow management. Use it to your advantage.
2.make a budget for your life considering future goals & stick to it
3.use forecasting method
4.make an emergency fund
Cash flow management gives you a sense of empowerment which boosts your confidence.
Preparing household budget
You can take the help of investment adviser or you can do it all by yourself. Prepare a list that contains all income sources & application of these typical funds. Some of the income might be regular in nature while there might be investment income which is irregular & small like dividends.
There are small amount that needs to spend compulsorily every month. Call it as mandatory expenses. Others are essential living expenses which are daily necessity. Finally comes discretionary expenses you can control it if you want to.
Substract total expenses from total income. This would give you savings managed by household. Note the difference between monthly surplus in hand & savings. Calculate onthly surplus after mandatory deductions such as contribution made to Provident fund & national pension scheme. Add them back to monthly surplus in hand to arrive at savings.
Note down all income sources like gross salary, income from investment, total income,
Expenses like mandatory expenses (contribution to pf, tax, loan repayment) , essential living expenses (grocery, fees & education, rent, maintaince other charges,) transportation, telephone & internet, utilities, discretionary expenses ( entertainment, lifestyle expenses), total expenses, investments, net income, monthly surplus in hand, savings, saving ratios(savings/ total income)
Effective Cash management–
Cash management is proper balance between income and expenses figures. You need to maintain a balance. Too many expenses at start of month can cause mismatch so beware of your spending. Always maintain surplus amount in bank to ensure some extra expenses that might suddenly arise. You can create a separate fund aside for this purpose. This is different from emergency fund.Use it when income disruption occurs. Separate fund can help to tackle some short term cash mismanagement.
So effective cash management is the most important thing in every household budget. It requires understanding of exact nature of income and the expenses to be able to create right cash handling position. Always make income & expenditure statement so you become aware of where the money is actually going & what needs effective control.
Budgeting & forecasting
Income of household should be sufficient enough to meet current expenses providing savings to create assets that will help meet future expenses. You can secure your financial future if you can control household expenses. Use income to meet mandatory expenses such as repayment of loans, payment of taxes. Use maining income to meet essential expenses(living expenses), discretionary expenses (entertainment, recreational activities). Excess income is savings of household. You need to be prudent in financial management & target a required amount of savings every month
Steps to make a budget
1.list all the regular & other incomes you generate in the time period
2.list and deduct mandatory expenses from total income. You now get disposable income.
3.identify essential living expenses & deduct from disposable income.
4.list discretionary expenses & deduct from disposable income. Focus should be on managing expenses. As you can not earn more income beyond a certain limits.
Forecasting or projecting is the ability to look ahead & plan for future. You need to understand some conditions regarding forecasting. This involves predicting the future situation.This requires the individual or the household to look at how various events will play out because the final forecast will be based on the conditions prevalent at that point of time.
2.there is a basis when you make the predictions. Arriving at the basis for forecasting thus becomes a key aspect.
3. Consider various evolving conditions when you do the forecasting.
This makes forecasting a dynamic exercise.
4.you have to make several assumptions when you do the forecasting. Assumptions can also change along with the change in the overall conditions.
5. When you consider things, there might be a need for several experts or expert opinion in the way in so this assumes an important role in the overall plan.
You need this as one person might not know about all the areas and factors that impact decision making.
6. There has to be some experience present for the person making the forecasts. Hence, the more one does it, the better it gets because there is a proper idea of how things will work out under different circumstances.
Forecasting is an exercise.
Use it to move ahead with budgeting.
Monitoring budgets and provision for savings
Monitor the budget on a continuous basis and after looking at the difference seen in the figures,you need to take further action. This action has to be in the form of correcting the budget figures going ahead. If there is an area where there is a constant miss of the budget target then the planning is off track.you need to improve this through future changes.
For example, if there is a provision of Rs 4,000 a month for conveyance and the average conveyance expense comes to Rs 6,000 for a few months then it is clear that either you have to increase the budget figure or change the mode of conveyance to reduce cost.
The ability to provide various areas of action through monitoring ensures that the budget improves over a period of time. This is the desired outcome from the effort of monitoring.
There can be an end of the month monitoring that will give an idea about the actual situation but the effort also depends on the kind of record keeping that is taking place.
Track expenses
If there is a regular noting down of expense, then even do a mid month review so that a better idea is available about the manner in which the trend is going and if you need take some specific action in the remaining part of the month.
The final objective of the budgeting process is to have some element of extra amounts left with the individual or the household. The income has to be more than the expenses. This balance figure is the savings. You can use that to better the future. All the further steps in the financial planning process can arise only if you can generate savings.
There might be a small difference between the savings and the actual amount of savings. If this is there then bridging the gap is not a difficult task.
The real challenge is when the gap between the actual and the desired savings is huge. This will require a step by step approach to raise the savings level. It can consist of some of the following steps.
1.you can set a target of raising the savings rate by a specified percentage. This could be something like 10 % which is not too difficult to achieve.
2.You once achieve target that would result in a further bigger targets. It will ensure that there are constant efforts to raise the savings rate.
3. The manner in which the savings come about is also significant. Elimination of wasteful expenditure and cutting down on discretionary expenses are a good way to raise the savings rate.
4. You should divert Lumpsum of large receipts towards savings. This can give a boost to the overall savings rate.
5.you should not commit Higher income to some additional expense but you should keep it free for contribution to the savings rate.
Creating a personal Balance Sheet and net-worth
Create a personal balance sheet for an individual stating assets and liabilities at a single place. A balance sheet shows the financial position of the individual or household in the form of assets and liabilities at a particular date. Things can change after the date and the balance sheet will also change but it is necessary to see how stack up things are at a particular time and this what the balance sheet actually provides.
Assets for an Individual will include physical assets like property, car etc and financial asset like investment in equity debt and mutual funds. Liabilities include various loans short term debts like credit card dues,.
Difference between assets and liabilities would be net worth of individual and household. Income of household and individual is at base of all financial activities it undertakes. Use Income to meet mandatory expenses & set aside savings to meet future expenses. The savings is income minus expenses.
If expenses lies within income & there’s surplus to save then Household’s finance are stable. You can take loans to manage short term imbalances. please remember loans are a liability. come at cost which may further strain future income. Use the Option of loans to fund expenses with discretion since it weakens the financial situation of household.
Assets description
Physical assets are tangible assets and include real estate, gold, and other precious metals. Physical assets have an intrinsic value. The demand and supply affects their actual price. They usually seen as natural hedges against inflation since their prices show positive correlation with inflation. Physical assets are more growth oriented as they are bought for appreciation in value rather than the income they generate. Real estate provides both income and growth while gold are pure growth oriented assets. Primary drawbacks of physical assets are Illiquidity, lack of regulations)/limited regulations, assess the Merits of investment, arrange for purchase of assets. Other limitations are they require large amount of savings and loans to acquire.
Make the savings plan a part of the fixed figure in the budget and this will ensure that there are no variations here.
Healthcare costs are another financial risk for any family. Medical insurance, addresses this risk. People lose their jobs affection income streams. The double income can offer some kind of insurance against the job loss risk. If one loses the job, the other hopefully will retain the job. This would ensure that some income keeps coming in every month.
An emergency fund needs to be the first goal towards which a household or individual should save as a protection against the possibility of loss or reduction of income. The fund should be adequate to meet the expenses for six months, in the event the regular income is not available. The emergency fund should consist of liquid assets, to enable easy access.
