When There’s More Month than Money
The foundation for any sort of financial planning begins with cash flow management. Income − expenses = dollars available to be invested toward future goals. We’ve worked with people from all walks of life who have cash flow issues, including those with very high incomes. If there’s no money at the end of the month to allocate toward goals, only two choices: Increase income or cut expenses.
To frame the thinking here, I challenge clients to separate out necessary spending from discretionary spending. Necessary spending is just that: what must I spend to house myself, feed myself, clothe and groom myself, and get back and forth from work. Bare bones, in other words.
The exercise I bring to my readers then is this: Let’s look at every expenditure you’ve made in the last several months. Now sort them: necessary or discretionary. Here’s a basic list – you may disagree with my categorization, but that’s the point: to think the issue through of what’s necessary vs. discretionary.
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Is it Really a Necessary Expense?
This list has some concessions to modern life, as you can see. I’m listing mobile phone and home WIFI as necessities, since many people are able to and do work at least partially from home. Do you have any other entries for the list?
The vast majority of people, if they stuck to the necessities and some of the discretionary spending, can make their budgets balance. So I leave it to my readers: if you’re not saving enough, scan down the discretionary column, and see what you can live without to have money to save to achieve your financial goals.
And it isn’t even so much a matter of doing without as it is substituting one thing for another. An evening at home with good friends and a deck of cards can be much more pleasurable than an evening out at an entertainment venue, and much less costly. A book from the library reads just the same as one purchased. A generic handbag holds the same stuff as a designer bag.
If that still doesn’t work, and you just cannot free up investable funds, then you’ve most likely got some bitter medicine to take, and that’s best done in one big gulp: sell the car; sell the boat; make the hard decisions you already know you need to make.
Want to learn more? Check out Live Below Your Means.
