13 Aug Manage your Cash Flow
Cash flow is at the heart of your financial plan. If you are working, the ability to save after paying your expenses will have the biggest impact on your financial future. There are a number of different ways to manage cash flow. The pay yourself first strategy is simple and requires you to allocate funds each month for savings via an automatic payment just like any other expense. Management of credit cards is essential, because it is easy to fall into the trap of saving on one hand whilst racking up personal debt on the other.
Tools to help you manage your cash flow
There are a number of cloud-based, cash flow management tools available which link to your credit card and bank accounts, and which allow you to track your income and spending in real time. These tools serve a number of purposes including:
- Checking the integrity of credit card transactions to ensure they have all been authorised by you. This is infinitely better than looking at your statement at the end of the month and trying to remember whether you did indeed spend $22.30 at Amazon.
- Categorising your spending. Broadly speaking, your spending can be characterised as either fixed or fun, whilst your savings represents your future. This allows you to make a conscious decision to live the lifestyle you want, whilst planning for your future financial wellbeing. Using software allows you to look back at the end of each month, quarter and year and generate reports of your spending. This can be compared to a budget and give you a reality check about your spending to assist with decision-making. For example, can you afford the increased mortgage payments for the new house purchase
- Saving you time when it comes to doing your tax return. You can flag all expenses which have a tax impact (e.g. donations and work expenses) and then generate a report at the end of the financial year.
The process may sound onerous but it isn’t. It is just about forming new habits. The cash flow tools are smart in that they recognise recurring transactions (e.g. at the supermarket or buying petrol) and automatically categorise them. Our experience has been that clients end up enjoying the process and feel more in control of their financial life. There are a number of independent cash flow tools available such as Xero (a popular online accounting software package out of New Zealand) and Pocketbook (a local project run out of Sydney). Some of the major banks have developed personal cash flow tracking as part of their internet banking functionality. NAB and Bank of Melbourne were amongst the first, although ANZ have offered MoneyManager outside of their internet banking platform for some time. Commonwealth Bank have also recently launched MySpend. The bank programs tend to have less functionality in terms of generating cash flow reports, but they do provide the convenience of being able to manage everything in the one place.
Cash Flow in Retirement
Cash flow management is no less important if you are in or approaching retirement and need a regular income whilst maintaining confidence that your capital will last throughout retirement. In retirement, there is greater emphasis on the selection and combination of investments in your portfolio, which will require ongoing monitoring. High-quality, fixed interest investments and blue chip stocks paying fully franked dividends are often the core of a retiree’s portfolio. Preferably, these should be held in a low or zero tax environment (superannuation). This portfolio may be supplemented by rental income from properties that have been paid off, as well as by Government benefits if they are available.
[titled_box title=”Case Study ” bgColor=”#ff8400″ textColor=”#ffffff”] Joel (42) and Ilana (38) have three children[pullquote3 quotes=”true” align=”right” variation=”orange” bgColor=”#ffffff” textColor=”#eda617″] After six months on the cash flow monitoring program, Joel and Ilana have the confidence that they have enough cash flow to take on the bigger mortgage and they are ready to buy their new house. [/pullquote3] between the ages of six and twelve.Joel works as an IT consultant full time and Ilana as an optometrist three days a week. They are growing out of their three-bedroom unit, but are unsure about taking on debt above their current mortgage of $250,000. They manage to pay their bills and credit card balance on time, apart from the odd occasion when unexpected expenses such as car repairs occur.However, they don’t know where all the money goes. [/titled_box]
Their financial planner sets up cash flow management software linked to their credit card sand bank statements.All transactions are reconciled on a weekly basis and expenses are also allocated under a range of specific categories e.g. groceries, entertainment and household expenses.
After a couple of months of tracking their expenses, Joel and Ilana have enough information to prepare a family budget. Their financial planner was also able to benchmark their spending against other people at asimilar stage in life. In their case, they found out they spend 20 per cent more on insurances compared to the average household. By reviewing their health insurance with an online comparison site (ChooseWell), getting advice from an insurance broker for their home and contents and restructuring a large part of their life and disability insurance through their superannuation funds, Joel and Ilana saved over $1,500 from their personal cash flow.
After six months on the cash flow monitoring program, Joel and Ilana have the confidence that they have enough cash flow to take on the bigger mortgage, and they are ready to buy their new house. There is still some monthly cash flow left after purchase, and they arrange for Joel to salary sacrifice an additional $1,000 per month into superannuation to help build their long-term savings. This is done automatically by payroll, so Joel and Ilana don’t really notice the difference but feel good that they are paying themselves first.
There are great tools out there to help you budget, as well as identify the average ways in which people in similar situations to you spend.
People Like U is a great example of this. You simply answer a short questionnaire, and the app provides you with a great level of detail on spending habits of people in comparable circumstances to you.
About Reuben Zelwer
Reuben Zelwer established Adapt Wealth Management in 2011 to help time poor clients achieve financial freedom. For over 15 years, Reuben has helped professionals, executives, business owner and those approaching retirement make the most of their circumstances by making good financial decisions. Reuben’s professional practice is complemented by substantial voluntary work, which has included setting up financial literacy and savings programs in the local community.