Channel name : Outlook Money
Date of the publication : April 28, 2022
One of the first steps you take when it comes to your personal finances is to manage your cash flows. Its pretty simple really; if you are spend more than you earn then you are setting yourself up for trouble no matter what your income.
This is why it is very important to be able to track and analyse your spending and savings patterns. Creating a budget and categorising how you spend your money on a regular basis can be quite an eye opener and oftentimes you realise that you are spending way more than you expect on things which may not be a priority for you.
So the first thing that you need to do when it comes to your finances is to create a budget. It does not need to be anything fancy. Take a notebook, jot down your income on one page and show the breakup of your expenses on the next page. If your income is higher than your expenses, you are off to a good start. If not, then start looking for places where you can create room to save. This will help you understand where your money is going.
A budget can give you an overall view of your cash flows and help you identify what expenses are important and what expenses you can cut down on. You need to start saving for the future, which is why you cannot spend all your money on your expenses. The best way to do this is to first set aside money first from your savings and adjust your spending accordingly.
There are many apps online that can help you manage your cashflows. A quick google search brings up names like Goodbudget, Pocketguard, YNAB, Personal Capital, Clarity money and more. And if you go on the play store and iOS store on your phone, you will likely find one that best suits your needs.
However, personally I do not use any of these and prefer to do my budgeting in a different way. I find that it can get difficult to maintain the energy and consistency to manually monitor all expenses every month. For me the solution lies in automation.
When it comes to investments, SIPs have been a great tool of automation for investors because it automatically deducts money from the bank account every month and the investor does not have to worry about it too much. This creates a behavioural trick that forces you as an investor to allocate a certain part of your income to investments.
How would you implement a similar system for your expenses? Is there a way to automatically keep a lid on how much you spend every month? The answer lies in creating a separate expense account. Create a separate bank account that is dedicated only to your spending and transfer your spending budget to that account every month. If all your expenses are only debited from that account, it ensures that you stay within your self-defined limit.
Now, if you decide to spend more than what you have budgeted, you will have to take some extra steps to transfer the money to your spending account which will give you time to think about whether that spending is necessary or not. If you are smart about it, your spending can become much lower than your income and that will leave some extra money lying in your spending account which can be used to pay down debts or be invested for the future.
The beauty of such a system is that it is easy to implement, it relies less on you having to manually maintain a budget every month and it automatically keeps a cap on how much you spend. Taking this first step can go a long way to getting your cash flows in shape and put you on a solid footing towards financial independence.