What you will need:
- Cash Flows worksheet
- A pencil
- Bills and receipts from last month
Time required: Under 1 hour
The first step on the road to financial wisdom is discipline. Setting a budget is very simple, living on a budget is an entirely different story. This class is designed to start with simple budgeting methods that are easy to live by and work up to more powerful methods that will put you in total control of your money.
Download and print a copy of the Record of Cash Flows worksheet. The first question that comes up is why the worksheet is called a cash flow worksheet and not a budget worksheet. In reality, the two names are very similar. A typical budget worksheet would start with all your income and subtract different expenses until all the income is used. A cash flow record differs from a traditional budget worksheet in that cash flows quickly reveal if you have a positive cash flow (more money coming in than going out) or a negative cash flow (more money leaves than is replaced). We will be combining the powers of a cash flow system with the discipline required in a budgeting worksheet. In other words, we are going to use budgeting to balance our net cash flow down to $0.00
It may seem counterproductive to aim for a neutral cash flow. Wouldn’t we want a positive flow of cash? In reality, a nurtural cash flow IS a positive cash flow. Notice the first item under “Budget Item” is Savings. As long as savings are included in the budget, a neutral net cash flow signifies an improving financial condition and a sound budget.
I know you are anxious to get started, but before we do, let’s take a few moments and look over the various elements of the worksheet. Starting from the top we have the Cash Inflow section. This section is divided into 2 columns: Total and Actual. The Total column is for the best estimate, and the Actual column represents the actual amounts for the month (go figure). Under the list of inflow items there is a horizontal line with the title “Net Increase”. Don’t worry, there will be an example covering all this!
The Budget section (often called Cash Outflow) follows a similar layout, but adds a third column called “% Take Home”. This column shows what percentage of your total income was used to cover the budgeted item. It is a very useful number to know when modifying a budget, and we will take some time to discuss it later.
The final section calculates the net cash flow. The final line under each column shows $0.00 to remind us that our goal is to budget every penny.
Now the fun begins. Gather any bills, receipts, check stubs, bank statements, or anything else that shows what money came in and where it went. On a separate sheet of paper, list your incomes and expenses by category and add each up. For example: If the gas utility was $200, electricity was $100, cable was $40, and Phone was $60 you would add them all up and get a total utility category of $400. If you made $2,000 from one job and $1,500 from another, your total incomes would be $3,500
Step 1: Record your cash inflow
In the cash inflow item, write down what your estimated income will be in the total column. “Take Home Income” should include the sum of all your regular incomes, and “Other Income” can include things like gifts, dividends or other income that you are expecting this month. In the above example, $3,500 would be recored under “Take Home Income”.
Add the totals together in the “Net Increase” row.
Step 2: Record budgeted expenses
Using your scratch paper, record your best guess for set expenses in the total column. In the example above, $400 would be recored in the “Utilities” row under the “Total” column. Record all set expenses such as housing, utilities and debt payments as they were last month, or to your best estimate for this month.
Next, budget what you expect to spend on the other categories. Remember to be reasonable. $10 for food will almost certainly cause you to overspend your budget (unless you live with your parents). Some people may need to use one of the “other” columns for a “money to blow” category. Others will include this money in the “personal” section along with cosmetics or other toiletries.
Once the entire “Total” column is filled, add it all up under “Net Budget”. The parentheses are an accounting method to show a negative number or an expense.
Step 3. Calculate net cash flow
The numbers to calculate net cash flow come from the totals in steps 1 and 2. In the first row, record the total Net cash increase, and in the second row record the net budget. Find the net cash flow by subtracting “Net Increase” from “Net Budget”.
Step 4. Interpreting net cash flow
Now we will take a look at the result. At this point we are not that interested in the number, but the sign of the number (if it is positive or negative). If in step 3 your net increase was greater than your net budget you got a positive number. If it was smaller you got a negative number. If you budgeted perfectly your net cash flow was zero. Let’s take a look at what this means.
Negative Net Cash Flow:
A negative net cash flow means that you are designated more money then you are going to bring in. It doesn’t necessarily mean that you will be going further into debt, but it does mean that you need to start making some budget cuts. Perhaps you over estimated on your spending cash, or maybe you designated too much money into savings. At any rate, you need to reduce the amount of your budget. Repeat steps 2-4 again.
Positive Cash Flow:
A positive cash flow means that you didn’t budget all of your money. When money isn’t budgeted, money budgets itself. That’s a very bad thing. Maybe you didn’t save enough, or were too cheap on charitable giving. It could be that you underestimated some of your expenses or maybe even forgot a credit card payment. Find a home for this wandering money and repeat steps 2-4.
Cash flow of zero $0.00
A neutral cash flow is a sign of a balanced budget. Every cent is allocated to something. Your budget may not reflect how things will actually go this month, but it will show you for next month what needs to be changed. Go to step 5!
Step 5. Monthly review
At the end of the month, gather all your receipts and statements that you carefully saved and repeat steps 1-3 by filling in the “Actual” row of the chart with your actual incomes and expenses. Compare the “Total” rows to the “Actual” rows. Chances are they are different, but hopefully not by much. Calculate net cash flow like you did in step 4 and take a look at the number. The closer to zero you got, the better your budget was. Use this budget sheet to help setup next months budget.
That’s how you setup a basic budget! This simple process will give you more control over your money and help train you for financial greatness. After a few months of budgeting, you will notice that your budgets become increasingly accurate. Once you are comfortable with the basic budget sheet, consider trying a more advanced worksheet and new budgeting methods that give you more control. The process works exactly the same way.