How to Manage Your Finances

Today, I’m going to give advice on managing your cash flow. One of the most important to consider, when managing your personal finances, is to treat yourself as a business. Businesses live and die on cash flow. If a business runs out of cash, it fails.

Managing your cash flow in today’s world is necessary for financial success. The first step is to log all your income sources. For most, this is easy. Include all ways you get money. Obviously the biggest source is probably your job. Others include money from investments, interest, bonuses, child support, alimony, and allowances.

Next, you want to estimate your expenses. Include everything you spend money on. Groceries, gas, tuition, utilities, rent, credit card payments, mortgages, eating out, insurance, and anything else you can think of.

The next step is to put everything into a spreadsheet. This is important because it gives you an easy way to view all the information and make comparisons. Start your spreadsheet with you income page. The spreadsheet will have three columns for each month; estimated, actual, and variance. This will include all those sources of income you just listed. List the items in whatever order you wish, with a summation of total income at the bottom. Then you want to estimate the how much you will earn from each item each month, and sum them at the bottom.

The next page will be your expenses page. This should be set up in the same manner as the income page, except there will be categories. The two major categories are fixed and variable expenses. Fixed expenses are those which you know you will have to pay each month and have a cost which does not change. Examples of fixed expenses are insurance premiums, rent, mortgages, and loan payments. Credit card bills can be included, only if you pay the same amount every month. Variable expenses are everything else. You want to break up your variable expenses into categories, as well. These categories can be anything you like. It is best to break them up in a way which makes it easier for you to visualize. I use food/drink, transportation, entertainment, personal care, wardrobe, and gifts. Then, as with your income, you need to estimate all the expenses for each month. You should do this for at least four months.

Once you have all your income and expenses estimated, you can see if you are at a surplus (extra cash) or deficit (negative cash) and adjust your spending accordingly. The benefit of this is that if you know you are not going to have enough income to cover all your expenses, in a given month, you can do something about it. You can spend less the month before or plan on having to use your credit card. At the end of every month, you need to fill the “actual” column with what you actually earned and spent; then subtract those numbers from your estimates to get your “variance”. The goal is to have your variance equal zero. The closer your variance is to zero, the better you are at estimating your income and expenses.

This is the best way to manage your finances; it gives you an excellent visual breakdown of all your expenses and allows you to adjust. It also connects you with your finances so you are more in touch with what you spend your money on, which is a great way to make sure you don’t over spend.

There are many computer programs which can help you set this up. I fine Microsoft Excel works best for me. If you have any questions or comments, feel free to leave them below and I will get back to you as soon as I can.