In the last segment I looked at the net worth statement as your gauge for determining the progress of your financial plans. Maintaining a record of this calculation on an ongoing basis will build your confidence over time and reduce the stress of financial issues. My recommendation is to update the net worth statement quarterly[i]. Breaking the year into set financial segments gives a higher level of feedback and allows for adjustments before a budget variance can become a problem. So, now that you have a snapshot of your current situation, what's next?
Cash Management Planning: The Business of Family Life
I believe that looking at your family finances as a business will empower you to be objective in evaluating and correcting changes as they come. Financial issues have, perennially, been the cause of many family and individual conflicts[ii]. Separating it from the emotional side of life will eliminate the finger pointing, and make every person accountable for achieving the goals set. Every member of the family has a stake in the results, and so, as a stakeholder, will be more inclined to work together toward better management. Even in individuals, being objective will bring focus. What are the steps?
Establishing a cash management plan works to ensure that:
1. You can maintain family operations.
2. Provide an adequate emergency fund to handle unanticipated events.
3. Build a portfolio of productive assets.
4. Reduce the chances of illiquidity.
5. Create and maintain a solid savings plan for milestones like educational needs, retirement, and other long term goals.
Financial independence is achieved by managing these five areas assuring that your net worth grows in step with the goals you have set. If resources are not able to meet the goals you set, then, they or your goals must be revised to fall in line with them. Lack of control over cash flows is the most prevalent cause of financial problems. Hopefully you can see why this is an ongoing process throughout your life; because, life and its circumstances change and evolve over time.
Addressing the items above requires assembling a budget. WOW! NO, NOT A BUDGET! Immediately thoughts of constraints, having to "make do", and images of Ebenezer Scrooge beating you with a cane cascade through your consciousness. I'm right, aren't I? Settle down. This is the most misunderstood process ever. Contrary to what the word has come to infer, it is not about what you can't do, but, about what could be with the resources available. Budgeting is about projecting cash flows and verifying their feasibility versus the actual income and expense. In identifying discrepancies you are in control of how your assets are allocated, then you are managing, rather than being managed by, money. Budgeting and tracking your expenses gives you a strong sense of where your money goes and can help you reach your financial goals, whether they are saving for a down payment on a house, starting a college fund for your kids, buying a new car, planning for retirement, paying off debt, or saving for a trip to Jamaica.
As with the net worth statement the place to begin is gathering the information. What will you need?
· Pay stubs, and two years tax returns.
· A quarter's (three months) worth of bank statements.
· Credit card statements.
· Checkbook records for a quarter.
· Statements for all utilities and other services you use.
· Employers benefit statements.
· Financial account statements.
· Budget Worksheet[iii]
The second step will be estimating your future income and expenses. Separate income and expense items into two categories: fixed and variable. By fixed I mean those items that do not fluctuate; for example, if you are a salaried employee, the amount of your monthly income would be a fixed item. For expenses, the mortgage (or rent) payment, car payment, insurance, etc. would be a fixed expense. Variable then would be those that change from period to period. Ideally, prior to finalizing your budget projection, you should track your day to day expenses of cash out of pocket items, writing them down in a small notebook or entering them into an expense tracking app available for smartphones and iPods. Once again, this will help, not in castigating yourself but, to enlighten you about where the money goes. The whole point is to let you make a conscious decision about your financial life, letting you prioritize your goals and objectives. Don't be obsessive about it, though; I don't want you to end up facing a corner talking to the accountant in your head or anything.
Next, fill in the worksheet[iv]. The idea is to create a base-line. Your actual income & expenses can be entered in giving you a better understanding of where the money flows. Build your projected budget using the statements you gathered earlier.
There are many details to creating a complete budget, and it is important to have the detail because it will produce results once it is organized. I have worked with clients of all income and net worth ranges and creating a budget is the hardest part of planning. It really puts it all in black and white, and hopefully not red. Seeing the stack of income and expense statements may make you feel a bit overwhelmed. Take one piece at a time. Start with the income sources. Be aware that even on your paystub there are expenses that have to be noted: contributions to company retirement plans, insurance deductions, taxes, etc., will show up on those forms.
I hope that as we progress through these first steps it will help move you to become more empowered about your money. By the same token, I want all of you to understand that there are many interrelated parts to your financial life. My intention is to give you a starting point to organize and be able to contemplate how cash flow functions. I look forward to answering your questions as we move along...
Next time I'll continue with building the budget, then looking at what it's telling us.
In the mean time, be smart, be vigilant, but most importantly... Be wise!
[i] I recommend that you consider a personal finance program like Quicken®. It has some valuable budgeting and reporting features that will help you work with your advisor. If you don't have the software, Microsoft® Word or Excel as well as other word-processing and spreadsheet programs offer templates available on their website.
[ii] Coping With Financial Stress
[iii] see note(i)
[iv] See note(i)
Robert E Diaz is a registered representative of, and, securities offered through Kovack Securities, Inc. 6451 N. Federal Hwy., Ste. 1201, Ft. Lauderdale, FL 33308 Tel: (954) 782-4771 Member FINRA / SIPC; Robert E Diaz is a investment advisor representative of, and, Investment Advisory services provided through Kovack Advisors, Inc., 6451 N. Federal Hwy., Ste. 1201, Ft. Lauderdale, FL 33308 Tel: (954) 782-4771, a Registered Investment Advisor. Registered in the states of Florida, New Jersey, New York
Vine Financial Management Inc. Is a licensed Insurance agency in the State of Florida Lic. No.: L001886; New Jersey, New York
Whether in the world of personal and business financial consulting, or in consumer trade, many variables affect the outcome. It is in maintaining an understanding of those variables and designing solutions to them that differentiate success from mediocrity. -Robert E Diaz
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