Written by Kate Arnold
Our lives are constantly bombarded with plans, and that’s usually a great thing! From marketing plans and revenue plans, succession plans and exit plans, we plan our days and our weeks, with intention to follow our plans. We use methods to develop our plans and we write them down. We review and update our business and life plans at regular intervals.
As entrepreneurs, we recognize the value of a plan, but when it comes to our personal life things may not always be so planned. How is it that half of us expect to retire in debt? As Canadians, for every dollar we earn, on average we owe $1.65, and retired Canadians have identified day-to-day money management as their number one financial priority. How can this be? Is this part of our plan?
In Canada, it has not been part of our public education to teach students how to budget or Cash Flow Plan. In many cases, children do not learn this skill from their parents. So how do we, as adults, manage our money? Well, we rely on our established relationship with money, good or bad, to guide us, because most of us don’t know how to cash flow plan.
A personal budget or cash flow plan is not about buying items on sale or learning to use the ‘flip’ app. A cash flow plan is a written document that identifies your income, expenses, debt, assets, priorities and goals. It is a map that shows you where you are and how to get where you want to go. It is a reference point to return to when you lose your way or encounter a road block. It is a plan. A plan that can be developed using many of the planning methods you already use. When the right amount of time and care is taken to create your cash flow plan, you can use simple strategies in your daily life, to help you stick to your plan.
If you ask yourself, “Where does my money go?” or “Why can’t I build an emergency fund?” you have room to improve your personal finances. Here are a few ways to get started:
Know Your Credit Score
Your credit score is a three digit number. A score of 760 or higher is considered excellent. This is important if you want access to credit, purchase services on a monthly basis or unify debt in order to reduce the amount of interest paid on outstanding debt. A credit report does not include the three digit number but will give you a credit history. This is important in identifying any potential fraud against your credit. It is recommended that you request your credit score annually. Increased frequency can negatively affect your score. There are two credit reporting agencies in Canada, Equifax and TransUnion. You can request your credit score and credit report online, from either agency, for a fee of approximately $17.00-$24.00.
Know Your Debt and Debt-to-Income Ratio
Review all outstanding debts, including mortgages, and divide the total by your net income. This will give you a debt-to-income ratio. A number above 37% indicates your debt needs attention. Review the lending rate and length of term on each of your debts. This will show you how much it is costing you to service that debt.
Use Simple Strategies to Manage Day-to-Day Expenditures
Using cash can feel like an old way of doing business, but it is one of the simplest methods to help stay on track with a plan. Cash can help eliminate the need to track spending by writing everything down or committing to updating an app on a regular basis.
Separate your money into categories, so you don’t have to do the mental math required to manage all that flows in and out of your chequing account. It is also a great way to track your savings, which is more motivating to most of us, than tracking our spending.
Define Your Financial Goals and Life Priorities
Use the goal setting strategies with your personal finances that you use to develop your business goals. Defining your financial goals and life priorities will identify your short and long term goals that are essential in building a cash flow plan.
Find a Professional Who Specializes in Cash Flow Planning
We use professionals to enhance our business and personal lives in ways that we cannot do for ourselves. If you have struggled to feel in control of your money, consider hiring someone to help. A professional trained in cash flow planning can take an overwhelming task and simplify the process. Sometimes, we are too close to our struggle and an unbiased approach can result in positive change.
Adjust Your Way of Thinking and Speaking
Instead of saying “I can’t afford it”, make a conscious effort instead to think, “ I am choosing to spend my money differently”. This shift in thinking about your money, puts you in control. Try it the next time you want to make a purchase that you don’t need or doesn’t align with your values. Try this with your children – meet their “Can I have this toy?’ with “If you want that toy, let’s make a plan to save for it. Today, we are choosing to use our money differently.” This approach has been known to satisfy (or baffle) a child who is learning the value of money.
Navigating the sea of budget advice can leave you feeling all wet. It’s fun to try out a new app, but giving up your morning Starbucks may not be a commitment you are willing to make. Before you charge ahead with the latest piece of advice on how to save money, remember that it’s all about the (Cash Flow) Plan.
A version of this article was previously published on this website on February 3, 2016.
Cash flow image from shutterstock.com