Managing Your Cash Flow — Step 2

Once you know how much you’re spending each month, and on what (see Managing Your Cash Flow — Step 1), the next step is to create a plan to make sure your money is doing what you want it to do. Some people might call this a budget, but if that sounds boring and/or difficult, call it your spending plan.

There are lots of ways to create a spending plan, but I like to do what I call the draw-down budget. Allocate your money to the most important things first, the ones you have to pay: rent/mortgage, utilities, phone bills, etc.; and those you want to commit money to: emergency savings, retirement savings, holiday savings, and so on.

bell-peppers
Bell Peppers by Paul Brennan; CC0

You may want to set aside an amount of money for groceries and put it in the “have to pay” section; any money you spend beyond that is for treats or extras.

Once you’ve figured out how much money you HAVE to pay out each month, the rest goes to your variable spending. You’ll need to track it digitally or with pen/paper or use the cash method, but once your variable amount is used up, that’s it — no more spending for the rest of the month.

There are several advantages to the draw-down budget:

  • It’s easy to use.
  • All your bills get paid.
  • You commit money to savings.
  • You don’t spend more than you make.

I use a draw-down budget myself and have developed several categories of spending. If you use spreadsheets or would like to learn how, and how to use one to create a budget, contact me. I’ll be happy to share mine with you.

 

Kids learn the value of money

I would like to think that we did right by our children when it comes to knowing the value of money. At the very young adult stage, they are both going to university and still living at home with us. While I like to think it’s because they love us so much, the reality is that it’s very expensive to live in this city, and they’re saving money by staying here rent and grocery free.

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Victoria, where rent is not cheap

(Both of them have told us — in a nice way — that they would move out in an instant if they had the money!)

As they were growing up, we tried not to buy them too much (after the very young child stage — when we got a bit carried away with Christmas presents). At a certain point, we gave them allowance and told them they would have to buy their own toys. Their purchases were always greased with the generous birthday money that arrived from relatives. Around the age of 14, we started giving them a clothing allowance and told them that they would have to buy their own clothes (have you ever tried to buy clothes for a teenager?) When high school ended, so did their allowance.

On this topic, I was heartened to read 21 Things You Should Make Your Kids Pay For.  I agree with most of it, but I chose to pay for my kids to do extracurricular activities and school travel. All of us in the family tend to be introverted and mostly would prefer to stay at home given the choice, and I wanted the kids to expand their horizons.

In terms of their university costs, we have a deal with the kids. Rather than them taking out student loans, we will lend them the money. We all sign the papers (even the kid who’s not taking out loan) so that everyone knows how much is owed. The amount is noted on our statement of net worth as an asset. So far this has resulted in minimal loans and a real commitment by them to make sure they’re getting value for their money.

Managing Your Cash Flow — Step 1

Do you track your spending? Wondering how to start?

Tracking your spending is one of the most effective ways to get control of your money. I’ve been thinking about the ways that you can do this:

  • Keep receipts and record them, either electronically or on paper.
  • Use credit cards and/or debit cards for all purchases, then regularly record the amounts from your online statement.
  • Use an envelope/receipt system: Brainstorm a list of spending categories and write the names on separate envelopes. Or just keep one large envelope for all receipts. File your receipts in the correct envelope and add the amounts spent to keep a running total.

Can you think of other ways to track your spending? I’d be interested to hear about them.

Cash_rounding_receipts
Photo by MyName (Jnestorius (talk)) (Own work) [Public domain], via Wikimedia Commons

We use a combination of receipts and credit card statements and record our monthly spending in a spreadsheet. (We don’t use our debit cards unless we absolutely have to, as our bank charges us a fee for using the card over a certain number of transactions each month). My husband likes to keep track of our grocery spending (somehow that tends to get out of control) as he is often responsible for doing the grocery shopping (I hate it!) He keeps those receipts and records the grocery spending. I will check the credit card statement every few days and record any other purchases.

Regardless of your method for recording your spending, writing it down and adding it up often leads to revelations. (Wow, look at how much we’re spending on ____________!) And that can be the beginning of other conversations about taking control of your spending.

Advice Columns, Finance Style

If I have one secret vice, it’s reading advice columns. And I really enjoy the finances type, where people write in and ask if they can afford to buy a house or if they’re on track for funding their retirement. These make for interesting reading for a number of reasons:

  • I like to compare our own income and expenses with other people. Do we make more? Do we pay more for housing? How do our choices about recreation and other discretionary expenses stack up against others?
  • Related to the first point, I study other people’s expenses to look for ways that I think they could reduce them.
  • I study the posts for constructive ways to coach other people about money and learn what financial advisers are recommending to their clients.

One reliable source of financial planning posts is the Financial Facelift from the Globe and Mail Investing. I always look forward to their articles.

Financial planner ethics

We’ve been talking a lot in class lately about the code of ethics for Certified Financial Planners. When I spotted this CBC article, I thought it was perfect for our discussion.

A Vancouver senior is suing her former financial adviser and his investment firm, claiming her retirement nest egg was decimated largely by excessive commissions her broker earned by purchasing risky investments she didn’t authorize.

There are a lot of issues here, and one I presented to the group was that the person who was responsible for making the investments for her was considered her “financial advisor”. There is always a risk of a conflict of interest, especially when your financial advisor makes commissions on selling you mutual funds. That’s why I’m personally in favour of fee-for-service financial planners, and why, if you hire me to help organize your finances, I won’t be trying to sell you anything other than my services.

Untangle your finances while you can!

I really like this article about a fifty-something couple trying to untangle her aging parents’ finances:  The Difficult, Delicate Untangling of Our Parents’ Financial Lives.

It resonates with me in a couple of ways, the first because we are going through a similar process in my own family. Our job is a lot simpler because the accounts are better organized, but it’s still surprising how many financial tentacles we send out in the ordinary course of living our lives.

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Do you know where all of your bank accounts are located?

Second, this is what I hope for everyone who sits down to organize their finances, that they know the following:

  • which accounts they have, and where (online, physical locations, etc.)
  • how to access the accounts — and who can access them, in the case of joint accounts (passwords, passbooks, etc.)

Our accounts are organized in my own mind, but what if I were to die tomorrow? Would the rest of my family know how to access the money in those accounts? I have a list of passwords, but it’s encrypted (again, in my own mind!) so no one will know how to access my many online accounts. I’ve known for a while that we need to get a safe deposit box, but I just haven’t gotten around to it yet. Reading this article has spurred me on to get it done, and put my (unencrypted) list of passwords there. Along with my list of passwords, I’ll record all of our bank account numbers and life insurance policies — anything that a person would need to reconcile my financial life after my death.

Using credit cards… or not

The subject of credit cards can be a hot topic — hot like fire. They’re extremely useful, but if you’re not careful, you can get burned. Most people use them, and in fact there are a few things you can’t do unless you have a credit card — staying in a decent hotel being one of them.

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Most hotels, like this one near the castle in Heidelberg, Germany, won’t let you book with them unless you have a credit card.

I have had a credit card since I was a university student, and I’ve abused it a few times along the way, but I wouldn’t be without one now as it makes budgeting and tracking our finances so much easier.

 

Top reasons to use a credit card

  • Ease of use — you don’t have carry around large amounts of cash
  • Spending is documented on statements
  • Credit card acts as a secondary form of ID and guarantee (think hotels, etc.)
  • Builds your credit rating (if used wisely)

Top reasons to NOT use a credit card

  • Too easy to spend money you don’t have — spending is not documented until the statement arrives
  • Interest rates are insanely high!
  • Misuse of your credit cards results in a poor credit rating

Many years ago, I made a partial payment on my credit card by the due date, and then paid the remainder off a few days later. When I got my next statement, I was appalled. I had to pay $85 in interest! At that time of my life, $85 was a huge amount and not money I had to spare. I vowed at that time never to let that happen again — and it hasn’t. (More on the calculated use of our line of credit in a further post.)

Credit cards are an ideal budgeting tool, mostly because your spending is documented. If you use them in conjunction with your budget, you’ll know what costs to expect, and you won’t be surprised when you get your statement.

The best way to use your credit cards is in planned spending, not impulse buying. If you think about your purchases ahead of time and find ways to fit them into your budget, then you can use your credit cards with a clear conscience.

 

Getting a handle on your spending

One of the first steps I will take with you as a finances coach is to get an idea of your recent spending. If you buy everything on credit card and you bank online (like we do), then it’s reasonably straightforward. You can use a spreadsheet like Excel or Google Sheets to keep your information organized. Most credit card sites allow you to download information in a .csv (comma separated value) file. You can open these directly in the spreadsheet program. You may have to fiddle a bit with it to clean up the data, or you can use it as is.

The numbers for the amounts that you’ve spent will show up in one column. You can use one of the first few rows to label your spending categories, such as groceries, restaurant, insurance, etc. Keep all of your amounts in that one column, and copy and paste each number to its appropriate category, trying to stay on the same line, if possible. Because I had so many categories, my sheet stretched past one screen going sideways, which made it a little difficult to keep amounts on the correct line.

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I cleaned up my spreadsheet by deleting everything but the business name and amount. I also shaded every second row to make it easier to put the category amount on the correct line — although that doesn’t really matter.

Once you’ve categorized everything, total up the data. Find the total of the month’s spending (making sure you only include purchases, not payments), and find the total for each category. As a cross-check to make sure you’ve included everything in the categories, find the total of all of the categories. It should match your total for the month.

If you do that for three months, you’ll have a good idea of your recent spending. You should also be able to start identifying spending anomalies, purchases that only happen once in a long time, or may never happen again.

If you do a lot of transactions by cash rather than credit card, then you’ve got an extra bit of work ahead of you, and you may not be able to track your three-month historical spending unless you’ve kept all of your receipts. If you don’t keep receipts, you may have to start — and look forward to organizing your spending over the next three months. But that’s something I can help you out with, too.

Thinking about retirement

This CBC article addresses two issues for people moving into their pre-retirement phase (late forties to mid-fifties): massive debt, and not knowing if they have enough money to retire.

Canadians burdened with hefty debt worry about retirement: CBC Toronto

In the article, a financial advisor offers the following advice:

  • Look at your total net worth (everything you own vs. everything you owe).
  • How much are you earning today and how much are you spending?
  • What do you want to live on when you aren’t working — be honest, is that doable?
  • Break it down to “pots” of money (RRSP, pension, savings, property value).

Then it’s time to do the math and she says your answer should be pretty clear.

As a finances coach, these steps are what I would help you with. Many people I’ve talked to have stated that they want to organize their finances, but I suspect that most find the process a little overwhelming.

 

How important is a budget?

Do you have a budget? Do you stick to it — most of the time?

As a finances coach, these are probably among the first few questions that I’ll ask you, along with some other “big” questions, like the following:

  • Do you know how much your take-home pay is?
  • Do you know the total value of your assets?
  • Do you have an emergency fund to cover your costs if you’re out of work for six months?

I think that having a budget is fairly important. The process of creating one will answer a lot of questions for you, even if you don’t continue to track your expenses and record them. When my husband decided to retire in 2014, we wanted to know if we could afford it, as his retirement income would be considerably less than what he was making while at work. To create a monthly budget, I took the last three months’ worth of credit card statements (we do everything by credit card) and categorized each amount. The average of the amounts in each category became our budget number. We haven’t concerned ourselves so much with tracking our numbers each month and making sure we’re sticking to our budget, but I do a three-month retroactive checkup about once per year.

Partial budget
We use Google Sheets to create and maintain our budgets

Recently I’ve noticed that we’re spending a lot more on groceries than budgeted for. It has a lot to do with the low Canadian dollar and produce purchased from the US, but also our two teenage/young adult children who are still living with us — they eat a lot! However, we also throw out food, a lot more than we should. So we decided to start tracking our grocery and restaurant spending to see if we could keep it within the budgeted amount.

We’re now 22 days into February, and so far, so good, but it’s close. We’re 76% of the way through the month, and 74% of the way through our budgeted amount. We’ll have to keep a close eye on our food spending for the next week and make an effort to use up the food that’s already in the house. This should be interesting as we have visitors coming to stay with us for two days and a restaurant meal with friends booked for the weekend!