Budgeting Strategy: Inflow vs. Outflow
A key component to establishing a well thought-out budget is tracking cash inflows and outflows. Cash inflows occur when money comes in. Cash outflows occur when money is spent.
Knowing exactly how much money you have coming in and going out is imperative to making a thorough and accurate personal budget.
If your incoming cash exceeds your out-going cash, you are in good financial shape. You are spending within your means and have some money left over for savings and/or investments. This is the ideal situation, but, more often times, is not the typical one.
Surplus cash should be used responsibly. An occasional splurge (like a vacation or designer item) is fine, however, it should be primarily used for retirement investing or children’s education savings. These are the two biggest expenses that most people will face in their future. Most people will begin their professional life in debt from student loans and will not have an adequate “nest egg” to retire at all. You can offset that harsh reality by being diligent and saving surplus cash for your retirement and for your children’s education.
When your out-going cash exceeds your incoming cash, you are in debt. You do not have enough money to pay for all the things you buy. Most people address this situation by having revolving credit card bills which have a high interest rate (possibly up to 26%). If you continually fall into a debt situation every month, your credit card balances will grow, as will the interest. It will become a never-ending cycle of expanding debt.
You need to understand exactly how much money you have and how much money you spend every month in order to make responsible spending decisions. This amount should be about the same for every month – so that will make it easier to establish a thoughtful budgetary plan. Do not underestimate any of these figures. Don’t forget things like taxes, medical expenses, education spending, insurance payments, mortgage, rent, car payments, etc. One easy way to make sure that you don’t forget any important expenses is to look at the expenses from a previous year and make a realistic estimate. The more thorough you are, the accurate your budget will be.
Many people find that apps or programs that keep track of daily expense s and cash inflow are useful.
Find out what expenses are unnecessary (daily Starbucks, eating out, excessive spending on non-essentials, etc.) and begin the process of lessening and eliminating those expenses. Yes, it will be a sacrifice – BUT DEBT-FREE FINANCIAL FREEDOM WILL BE WORTH IT!!
Debt-free financial freedom is a difficult, but attainable goal. Learning the skills to be fiscally responsible is a key component to that freedom. Budgeting is one skill that will help you over the course of your lifetime, giving you a clear financial picture to overall wealth protection, growth and transfer.