Surviving Financially In An Uncertain World: Focus On What You Can Control, Part 1

The world has always been filled with uncertainty. Already, 2019 feels like it will be a year that will epitomize this. Government shutdowns, stock market swings, and whispers of a recession are just some of the topics filling our newsfeeds.

All these things impact us and our personal finances, but we also can’t control them. While we can choose to get caught up in the vortex of the news cycles, it is better to set all that aside and focus our energy on the things we can control.

Since April is Financial Literacy month, I am doing a special series that will give you practical steps for managing that part of your financial life that is in your control: cash flow. Cash flow is the foundation of a financial plan and a successful financial life. Luckily, your cash flow is one area of your life where you have the most control. Over the next four weeks we will discuss:

  1. How To Determine Your Current Cash Flow

  2. How To Be Proactive About Your Cash Flow In Order To Create Margin

  3. What To Do With The Margin You’ve Created

  4. How To Increase Your Margin Even More!

The one thing everyone needs and most people can’t seem to find is margin in their cash flow. If you put these steps into practice, you will be able to create margin in your budget and know how to steward it wisely.

The Importance of Understanding Your Current Cash Flow

Before you can create margin in your cash flow, you first need to identify what your cash flow even is. Cash flow is simply what money is coming in and where it is going. A common way of tracking this is through a budget or a spending plan. A household budget is one of the most powerful tools we have for taking control of our finances.

When we have a plan for where our money is coming from and where it is going, we can build a strong financial foundation for our lives by paying down debt, giving more, building an emergency fund, and increasing retirement savings (this will be covered in Part 3). It’s no coincidence that taking actions like these are what brings stability in the face of broader uncertainty.

When you look at a map, the first step in figuring out how to get where you want to go is establishing where you currently are. That’s why maps at malls and theme parks always have huge YOU ARE HERE labels.

Budgeting works the same way. Before you can create a spending plan that will give you margin to build towards the future, you need to understand your current spending habits. Today I will show you just how to do that. Even if you think you know how you spend your money, getting it in writing may surprise you.

Example: The LaFleur Family

I’ll illustrate the process by using the LaFleur family (with their permission) as an example. This is a real family whose name I’ve changed only for anonymity… and because I am a fan of the Green Bay Packers and this is the name of their new coach.

They are married with one toddler. They both work full-time and their child attends daycare. Their combined pre-tax wages are $130,000. They have two cars and commute to work.

Your situation may be similar or drastically different from theirs. It doesn’t matter. The principles in each step will work for any situation.

4 Steps To Evaluate Your Current Spending

This is the process to categorize your expenses in order to have a clear picture of how you are currently spending your money. This will establish a starting point as we discuss being proactive to create margin next week.

Step 1: Collect Data

Let technology help you. Virtually every bank, credit card, and financial institution has an online portal that allows you to download and export your spending data. Pull 3-6 months’ worth of data and get it all into one central spreadsheet.

Hint: There are several online services that can sync and centralize all of your accounts; allowing you to easily categorize and budget. I use mint.com and have always been happy with it.

Step 2: Categorize Expenses

My method is to break spending down into three separate categories which I refer to as “past,” “present,” and “future” expenses.  

Past Expenses

Think of these as your fixed monthly expenses – things you’d need to pay even if you just sat at home all month and did nothing.  Examples are mortgage/rent, regular tithe, phone bill, utilities, loan payments, etc. While these expenses can change over time (i.e. pay off a loan), they are generally steady costs from month to month.

Present Expenses

These are expenses you make decisions about day in and day out. Therefore, you have the most control over these. Spending on groceries, eating out, shopping, and other discretionary expenses all fall into this category. You’ll see later why identifying these and isolating them into one spot becomes helpful.

Future Expenses

Any remaining expenses that are not paid out monthly can be considered a future expense.  These could be fixed non-monthly payments like auto insurance premiums paid every six months or they could be variable non-monthly things like savings for car repairs and gifts. This is also where you can set some additional savings goals like paying down debt or saving for something big.

Here’s how these categories break out for the LaFleur family:

Past Expenses:

 

Present Expenses:

 

Future Expenses:

 

Tithe/Regular Giving

 

Groceries

 

Car Repairs

 

Mortgage Payment

 

Home Improvement

 

Gifts for Family/Friends

 

Water/Sewer Bill

 

Baby Care (Diapers, etc)

 

Florida Trip Winter 2020

 

Gas/Elec. (1 payment)

 

Meals Out

     

Trash Bill

 

Coffee/On the Go

     

Cable/Internet

 

Clothing

     

Cell Phone

 

Personal Care

     

Life/Disability Premiums

 

Entertainment

     

Day Care

 

Other Discretionary

     

Auto Loan Payment

         

Auto Insurance

         

Fuel for Vehicles

         

Gym Membership

         

*For simplicity’s sake, I’d recommend leaving out expenses that are automatically deducted from your paycheck. For the LaFleur family, these include health insurance premiums, 401K & HSA contributions, and mass transit. 

Step 3: Ascribe a Value to Each Category

Now it is time to look at your monthly habits and place a dollar value in each category. At this point, you are trying to determine what you are actually spending right now, not what you wish you were spending. We’ll do that next week.

For now, the goal is to get an honest and accurate picture of your typical monthly spending; even if it’s painful to realize. It’s critical to the process that this information be real. You must know where you are now in order to determine where you want to be.

“Past expenses” end up being rather straightforward because there is a regular monthly payment associated (mortgage, rent, installment payments, utility payments, etc.). Others are more variable and will take a bit more time to determine the monthly average. For these, it is best to project your annual expense and divide by 12 to get an average month. This works well for expenses like auto repair where you may go a few months in a row with no activity followed by a month with an inevitable big repair expense.

Back to our example with the LaFleur family:

Past Expenses:

 

Present Expenses:

 

Future Expenses:

 

Tithe/Regular Giving

$1,000

Groceries

$500

Car Repairs

$50

Mortgage Payment

$1,300

Home Improvement

$85

Gifts for Family/Friends

$70

Water/Sewer Bill

$50

Baby Care (Diapers, etc)

$180

Florida Trip Winter 2020

$300

Gas/Elec. (1 payment)

$120

Meals Out

$300

   

Trash Bill

$25

Coffee/On the Go

$85

   

Cable/Internet

$85

Clothing

$100

   

Cell Phone

$100

Personal Care (haircuts, etc.)

$60

   

Life/Disability Premiums

$200

Entertainment

$275

   

Day Care

$865

Other Discretionary

$300

   

Auto Loan Payment

$350

       

Auto Insurance

$110

       

Fuel for Vehicles

$100

       

Gym Membership

$90

       

Past Total:

$4,395

Present Total:

$1,885

Future Total:

$420

Total Budgeted Monthly Expenses: $6,700

Take notice of what isn’t included in this step: savings, investments, or extra payments on debt. This will be discussed in Part 2 of this series, which covers what to do with the margin in your budget.

Step 4: Calculate Your Margin

Add up your monthly take-home pay to get a single total.  Factor in any extra income, bonuses, or cash you expect to receive throughout the year to arrive at your expected monthly cash. Lastly, subtract your budgeted monthly expenses from your expected cash to determine your monthly margin.

After tax-withholdings and the footnoted deductions, the LaFleur family expects to receive $7,100 in cash each month. We saw above that they have an expected monthly outlay of $6,700. Therefore:

$7,100 - $6,700 = $400 in average monthly margin

In a normal month, the LaFleurs will have a small surplus. They are generally taking in more cash each month than they need to pay for their lifestyle. This is good. However, it’s just around 5% of their monthly budget.

Now that you’ve figured out your current cash flow, what do you think? Do you think you’re on track to achieve your long-term financial goals? Is there anything in your current situation that you aren’t satisfied with?

Read Part 2 of the series to learn how to make cash flow changes in order to be proactive and take control of your financial life!

 

About Wacek Financial Planning

Founder Ben Wacek is a fee-only Certified Financial Planner™ and Certified Kingdom Advisor® who has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. If you’d like to learn more about Wacek Financial Planning, please visit www.wacekfp.com.

 

Photo courtesy of George Becker on pexels.com

 

 

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