As the current recession continues to widen and deepen and credit markets tighten, it has become painfully apparent that cash is the king in this environment. However, because most Americans have been living in a plastic world of easy credit, it is difficult to get back to the basics of cash management.
With high unemployment, poor investment returns and declining home equity, your family’s financial survival may depend in a large part on your ability to manage your cash.
Managing Your Cash
The major areas of effective cash management are: understanding your income and expenses; maintaining your income; and reducing your expenses. The cash that you save can be used to either reduce debt, build an emergency fund, or provide for future financial goals, such as education and retirement. Below are my five steps to cash management.
Five Steps to Cash Management
Step 1- Start by gathering your financial records for the past three months to determine your monthly net income and expenses. Since income and expenses can vary from month to month, you may have to estimate some cash flow items for all twelve months to come up with a monthly average.
Step 2- Create a Cash Flow Worksheet. This will give you a baseline for your monthly cash flow. You can set up your own spreadsheet or use online resources such as: www.moneycentral.msn.com; www.mymoneymanagement.net or purchase software programs like Quicken or Microsoft Money. These websites are provided as a courtesy and are not under the control of the Financial Network Investment Corporation.
Step 3- Use your Cash Flow Worksheet to track your actual expenses. At the end of each month, tally up all of your income and expenses, using your pay stubs, checkbook, credit card statements and receipts. Buy a pocket-sized notebook to keep record of out of pocket cash expenses, such as taxi fares, lunches, haircuts, movies, magazines, etc. Now compare your actual income and expenses with your original estimate and readjust your estimate.
Step 4- Analyze your cash flow statement with your family. Have you maximized your income potential? Are there opportunities for overtime or a second job for a few months?
Look at your expenses. How can you reduce them by 10-20 percent right now? First, reduce your cable/satellite TV, mobile phone and computer/game expenses? Next, look at items such as clothing, entertainment, eating out, transportation, etc. Consider alternative ways to reduce expenses such as buying clothes during seasonal sale periods, cooking meals at home, or using public transportation.
Pay Yourself First
Step 5- Establish a savings goal of between 10 to 20 percent of your gross income. You are probably thinking, “Sure I want to save, but I can barely pay my bills.” The secret is to save first and spend what’s left over. Savingsmustbe the first item in yourbudget every month. Pay yourself first, because you do all the work.Setup an automatic saving withdrawal from either your paycheck or checking account. If you don’t see the money, you are less likely to spend it.
Effectively managing your cash is a lot of work! However, during these difficult economic times, your family’s financial survival may depend to a large extent on your ability to reduce your debt and improve your cash flow. Start today to put your family in the position where the Cash King is serving you!
Michael G. Shinn, CFP, Registered Representative and Investment Adviser Representative of and securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or to send your comments or questions to shinnm@financialnetwork.com. © Michael G. Shinn 2009.
