I assume you know how much you earn each month; but do you know how much you’re spending?
No, I’m not going to ask you to keep a spending log but I am suggesting that you invest the time required to get a firm understanding of your current cash flow situation. However, if you find that you can’t account for a significant amount of your spending, then you might want to keep a spending log for a week or more to see where those missing dollars, pounds or euros are going.
This is an exercise that is best completed using a spreadsheet but it can be done on a sheet of paper with the aid of a calculator.
What you need to complete this exercise is a copy of the accounts that you pay and your bank account statements, and I recommend that you do it for a complete financial or calendar year.
- If you are an employee, use your net income; that is, the amount you actually receive from your employer – that’s the amount you’re trying to live on.
- If you’re self-employed, use your gross income. Taxes and levies are expenses you need to allow for each month. Even if you only pay them quarterly or annually, you need to have the cash to do that at the time. You also need to account for your business expenses as well as your personal expenses, and know the difference between the two if you want to avoid disputes with the tax authorities.
Draw up a table with months across the top and a list of income and expenses down the left hand side.
Group your personal expenses into two categories: essential and discretionary.
Essential expenses are the things required for survival; like food, water, housing, electricity, and clothing.
Discretionary expenses are not related to survival. They’re expenses you have a choice about, things like going to the movies, eating out, a new pair of shoes, cigarettes and life insurance.
Some of your expenses will be regular in the sense that you need to pay them every month or quarter. For example, expenses like rent or mortgage payments are usually both fixed in amount and regular in frequency of payment. Food and utility payments, on the other hand, may be regular in frequency of payment but variable in amount. Items like car expenses may vary both in frequency and amount.
How many credit cards are there in your household? Remember to include any loan and credit card repayments you are required to make as expenses.
To keep things simple, I suggest you create an expense called ‘petty cash’ as a catch all for the money you spend on low value items like coffee and lunch during the month. The important point is to get it as accurate as you can without stressing over every dollar, pound or euro.
Analysing your data
When you have filled in the table, total your expenses for each month. Then, for each month, subtract your total expense amount from your monthly income, and record the result in a separate row labelled cash flow. If you used a spreadsheet, you might want to graph that result. It’s also valuable to compare the total of your annual expenses with your total income for the year.
- If your annual expenses equal your annual income, you need to do something.
- If your expenses exceed your income – you definitely need to do something.
Hint: If you have credit cards and you can’t clear the debt in a particular month, you spent more that month than you earned. If you have rolling credit card debt, which you never seem to be able to pay off, you’re spending more than you earn.
In the final analysis, if you need to do something, there are only two things you can do: earn more income or spend less money. If spending less is your only viable option, you need to draw up a plan – also known as a budget – and apply self-discipline.
This is a draft of material that will eventually appear in Everyday Productivity, the next title in my Everyday Business Skills books. Please feel free to offer feedback in the comments.
Peter Mulraney has forty years experience working in schools, banking, and government. He is the author of the Inspector West crime series, the Living Alone series of self-help books for men, Sharing the Journey: Reflections of a Reluctant Mystic, The New Girlfriend, and the Everyday Business Skills series.