Holiday Hangovers and Cash Management

All of us know that Christmas falls on December 25th. Every. Single. Year.

I’m going to take a wild guess and say that many readers may be feeling a cash crunch this January from holiday spending. Now is a good time to re-evaluate the importance and value of good cash flow management (aka Budgeting).

Most of us can remember special celebration dates like anniversaries and birthdays, and plan for vacations. But we rarely set aside funds for them. Let’s build a plan to bring back more joy and have less stress surrounding these important milestones, and to make progress toward longer term goals.

And, if you’re thinking cash flow management is just for people with lower incomes, take a look at this recent article: Why the poor do better on these simple tests of financial common sense. My experience working with some High Net Worth families has shown me that sometimes cash flow issues are not always an income issue. In fact, having higher levels of income sometimes hides spending mistakes.

With no disrespect to Richard Carlson, maybe you should sweat the small stuff.

Do you know how much you spent last month on purchases less than $20? If so, you’ve probably already got a great tracking system in place. If not, now is a great time to start tracking how those smaller expenses add up for you.

Would you know it if you had a $150 bill due each month? Most people would, but I’m sometimes guilty of not noticing the $5 that I spend here and there on ‘small stuff’.  It’s easy to forget that $5 a day is $150 a month.

If you deposit $150/month into an account that could earn even a 5% annual return, in 20 years you would have deposited $36,000 and it would have grown to $73,986 during that time.

But it’s hard to think about behaviors over a long period of time, isn’t it? Let’s break it down to be more manageable:

1.  Plan. 

What would your ideal budget look like based on your current income? Feel free to think radically about changes you may want (or need) to make.

Be sure to include items that don't occur regularly (like Christmas, birthdays, vacation, etc.).

Don’t overcomplicate it. It’s simply income less expenses.

Important Note:

Most cash flow management/budgeting advice focuses on cutting expenses.  But when it comes to cash flow, there are two sides of the equation, and spending is only one. The other side is income! Clipping coupons is fine, and necessary sometimes, but may only have a limited impact on most people’s overall financial position.

The ability to earn more through an additional skill, certification, or educational attainment will have a much bigger impact for a much longer time, but we often forget about the opportunities to increase our income that are available.

If you could increase this year’s income by 10%, the value of that one change over the course of your career starts compounding and can become really significant.

2.   Evaluate.

Last year’s income and expenses:

We live in a time when we have more information that we know what to do with! Put some of that information to good use. Look up your credit card statements and bank statements to get a feel for what your past trends tell you. Some accounts even offer an annual summary with graphs and charts showing spending categories.

This part is a judgement free zone. Just gather the facts. We’ll evaluate later.

Current spending:

If you’re looking for a way to get started on your own, you can look to apps that provide spending tracking (but without the planning help of an advisor). Just start tracking it somehow. Paper and pencil still work too, btw!

Clients of Bridge Financial Planning have a personalized client dashboard where all assets, liabilities, income and expenses can be tracked in one spot and is integrated with their financial plan.

Now that you’ve got the data, are you surprised by anything?

Are there a few things you wish you had not bought, or expenses that really didn’t add value to your life? Probably. No one gets it right all the time.

What are the expenses that represent good memories, and progress toward your goals? This year, we want to have more in this category, and fewer in the non-value category.

3. Implement.

Some changes will be easy to make and obvious once you take a look. Other decisions will be really tough.

When you get to those tougher decisions, think through what purpose or goal will be accomplished with each spending, saving, or giving choice.

4. Adjust.

I wish I could tell you that when you come to the end of this process all your budgeting/cash management issues disappear. But like most other things, it requires ongoing dedication. The most important thing is to start.

It starts today. Best wishes!

P.S. We’ve all heard the saying that “money can’t buy happiness,” and it’s true. But there’s a great book, Happy Money, by Elizabeth Dunn & Michael Norton that shows us the science behind happier spending decisions. There are some great lessons in there! Hope you are able to check it out.