Cash seems so slippery these days. Didn’t you just put a $20 bill in your
wallet yesterday and now it is gone? Well, that’s not a new phenomenon.
The Bible says money takes wings like an eagle and flies away (Prov. 23:5)!
Everyone is- or should be – concerned about controlling his or her cash.
It is one thing to have a budget and make a financial plan. It is quite another
to control the actual cash flow so that one actually ends up accomplishing that
plan. The only way to accomplish your long-term goals is to generate a cash flow
margin – and that only comes through spending less than you earn.
Although it is difficult to control cash flow, it is not impossible. The process
can be broken down to a few essential items.
The objectives of establishing and maintaining a cash flow system are:
- To allocate
funds to meet expenses at predetermined levels.
- To know one’s cash
at all times relative to the predetermined level of spending.
To meet these objectives the control
system one establishes should have
the same effect as an envelope system.
As a matter of fact, the use of envelopes
is not a bad way to implement a cash
flow system until the habit is established.
Even though you may be giving up some
interest earnings on your cash by having
it sit around in envelopes, the lost
interest cost is far less than the overspending that would occur without
the controls.
In the envelope system, if you put $100 into an envelope for food,
then a level of spending has been established. As money is spent from
the envelope, the cash balance relative to the established level of
$100 is determined simply by looking into the envelope to see how much
is there.
In today’s environment, however, it is often inconvenient or
unwise to keep envelopes with cash lying around the house. Therefore,
the budget system should be adapted to work with a checking and savings
account. You can use a checkbook-type ledger (the kind used in wallet-size
checkbooks) as envelopes. These are available through banks. As an
alternative, a sheet of paper could be used as long as it has columns
for showing dates, purposes, deposits, withdrawals, and balances just
as a checkbook ledger does. Each checkbook ledger has the same effect
as an envelope in the budget system.
Before one sets out to implement a cash flow control system, he must
be committed to exercise discipline and not to spend beyond his designated
amounts. The following principles should then be incorporated into
your cash control system:
- Always measure actual spending against
planned spending. The key is to know as soon as possible when
budget limits have been reached.
- Exercise discipline. Is a budget
extra work? You bet it is. However,
the benefits are more than worth the
effort. Even so, once the budget is
established, it should not require
more than 20-30 minutes per month.
- Do not use credit cards, except as
a “check” (a
debit card). Nothing will destroy a budget faster than having
to meet unexpected debt payments. Debit card use requires a timely
accounting within the budget.
- Make sure each portion of the budget
has a zero balance at the end of
the month. All funds not used during
the month should be transferred to
savings. If spending is done on an
average basis, then it will be necessary
during some months to transfer from
savings back into the budget.
- Be flexible.
At times, it may be necessary to
use funds allocated for one purpose
for another purpose. This is allowable
but will require a specific decision
each time a transfer is made. For
example, one may decide to give up entertainment money to buy
clothes. The budget will allow this to be done in a visible
manner.
These principles will enable you
to get a handle on your cash flow.
And unless you accomplish that, you
may never see your financial plan
come to fruition.
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