Individuals and families should adopt financial tools from business and begin to think like a personal corporation. Three tools that are informative and useful for planning are 1) a balance sheet, 2) a cash-flow statement and 3) a cash-flow tracking tool. I covered the balance sheet in my previous column.
A cash-flow statement is a plan based on your needs and dreams. A cash-flow statement should be developed on a one-year basis to account for ongoing expenses plus those paid once or twice a year. A one-year, cash-flow statement also covers self-employed people who do not have a steady income from month to month. You project your entire income for a year and then begin to decide what your expenditures will be. It is important to plan your dreams at the beginning so you’ll have enough money to reach them.
Most people find it is hard to do a cash-flow plan the first time because they don’t have all the information they need. In the beginning, this step will probably take about three hours and a lot of guess work. It will be well worth the effort and very easy to update once you have done it.
The third tool, a cash-flow tracking tool, is the most important and is the one left out of most money-management systems. This is the step where you actually keep track of the money you spend and deduct it daily from the amount you planned to spend. The cash-flow tracking tool allows you to make decisions daily that relate to money. This step is the best way to ensure that you will actually do what you planned.
One tracking method that is very easy to use is "Using a Check Register to Track Your Expenses" available through Montana State University Cooperative Extension’s Web site at http://www.montana.edu/wwwpb/pubs/mt8703.pdf. This method helps people reach their goals by tracking expenses (cash, checks and credit cards) on a daily/weekly basis. People get off track when they wait too long to tally their expenses. By tracking with a checkbook register, we can readjust right away if our spending gets out of hand. If we wait too long, it is very difficult to recoup from excessive spending.
The point in a money management system is that it is yours. Keep track as if you were a business and you’ll reap the rewards of your success.