How much time do you spend on managing your personal cash flow in your overall financial planning ? I bet very less – most of the time is spent in digging through various reports on which investment avenues are good , how much will they return and how to invest in them. While investing your hard earned money is important, generating that money intelligently is equally important as well.
That is what is referred to as personal cash flow management. As the words indicate, it refers to money come in, which are your income and money going out, which are your expenses. Ensuring that you are living within your means is one of the most challenging tasks for investors today.
How to Manage Personal Cash Flow ?
This is easier said than done. It is boring, takes precious time that one could put elsewhere and is unimportant. But wait.
If this were so unimportant, my client Mr Dalvi (name changed) would not be at his retirement stage and would not be spending 120% of what he earns today. You heard that right – many people withdraw from their savings to spend without even knowing about it. Now that is an absolute disaster especially when you are hanging up your boots.
At an early age in life, you could be more prone to such erroneous ways of life. But this is not sustainable over a long period of time. One day your personal net worth will dry up and your income expense statement will become next to impossible to manage.
Is there a solution ? Yes, fortunately there is if you are willing to devote sometime on it.
Manage Personal Cash Flow will begin by first understanding the constitutions.
Income
First, there is the income. Income across the household is something which will grow at its own pace. An individual cannot generate a massive increase in his income – for those who fall in this category, I’d like you to be my employer !
Expenses
To manage personal cash flow, next comes the expenses. This is the money going out which we referred to earlier. Expenses are generally classified as fixed expenses and discretionary expenses.
Fixed expenses or non-discretiona
ry expenses are your must expenses each month – they could be groceries, education for kids, fuel, rent, utility bills and other mandatory heads of spend.You have to incur fixed expenses each month to live your life. This cannot be done away with.
Discretionary expenses are lifestyle expenses that you should curb to the best of your abilities. Dining out, movies, club memberships, extravagant shopping will jack up your outflow and make your things lopsided. The best way to save money around the discretionary expenses is to develop a vigilant attitude toward cutting costs, no matter how small.
The best, successful and intelligent investors are those who control their discretionary expenses. Trust me, this is one thing which can make or break the financial path you are taking to your future.
Also don’t forget that you must first project your expenses before you incur them. Otherwise you would not be tracking expenses against a baseline. Most of us are guilty of not doing that.
Savings
Savings is income minus expense. This is your savings which you should invest for your future. Many investors keep their previous savings and current income at one place (bank account) so can never track from where they are spending.
A significant amount of your time needs to be spent on ensuring that your income minus expense is such that you are left with some surplus each month which you can channel into savings. Now savings is all about picking the right products and investing in them in the right way. If you do this right, with time you will have grown your personal net worth.
Ensure you are saving at least 20% – 25% of your net take home each month. It’s a pretty simple calculation that you can do in your mind to understand this so you don’t have to necessarily do this using tools and sheets.
Manage Personal Cash Flow – To recap :
- Know from where all your income is coming from. Forecast income.
- Track fixed and discretionary expenses. Forecast expenses.
- Cut down the discretionary expenses.
- Use budgeting tools/sheets to monitor.
- Try maximizing your generated surplus each month to channel them into savings for the future.
- Keep an emergency fund to ensure you do not disrupt your cash flow should an emergency arise.
Overall, in order to manage your personal cash flow, you need to be conscious of how much money you spend and why. If you cannot live within your means, you will not be able to generate the surplus money needed each month to invest for your future financial goals. And if you cannot do that, you will not be able to meet your aspirations in life. It’s a choice you have to make now.
@Radhey,
Excellent post. I maintain an excel sheet through which i keep track of my income & expenses.
Rakesh
@Rakesh, Try the online way, less time consuming. Rs 500 for an annum at perfios.com.
@Radhey,
Yes I agree but i am not comfortable with storing my bank/personal details on third-party site. Even though they guarantee but sill don’t trust them.
Rakesh
@Rakesh, Perfios does not store it. It’s stored at your end. Check out how it works.
@Radhey,
Ok, i will give it a try but i would still prefer the good old excel; simple to use and easy to maintain.
Rakesh
Again a great & informative article.
I do keep a track of my cash flow.
@Sudip D, How do you do it Sudip and what do you use ?
Personal cash flow management is the most important and the foundation for investment planning.
Most of the people using excel sheet. Perfios had good initiative and they were providing free service to our company, though very less people went to use it. It’s always difficult to trust while puttting in all your information.
Let’s see if it changes in future. ICICI Bank also started Money Manager.
@Chirag, Is ICICI Bank’s Money Manager free ? I thought they were charging for it.
@Radhey Sharma, I think ICICI Bank was giving money manager free for 1 year for bank a/c holders, currently not sure. Obviously they won’t give for free ;)…….
Perfios was free for me (might be some time limit was there), though I didn’t use it.
@Radhey,
No, its not free. They have a 30 day trial offer after that the charges are Rs. 25 per month.
Rakesh
Nice Article Radhey..
I just started keeping a track of my Cashflow some time back.. Still naive to this field of Financial planning.. Trying to get as much information by various informative articles (including yours).. I maintain the record of Expenses & investments by good old “Diary method” along with maintaining an “EXCEL sheet.”
Kindly keep us informed about all the necessary aspects of FP..
Thanks..
@Aparna Nema, I used to use both then I needed to cut down on time. So I went online.
But bet at it as it is very important. I was amazed at what I saw in my expenses.
I intend to talk about my cashflows after March this year in an article.
I use an free app called Iwallet on my andriod phone to keep track of expenses. It is a neat and simple software that allows you to enter your daily expenses against a set of categories. You can create you own categories and you can also see a graphs of percentage spending on each category by week, month and year.
@Abhilash, Yeah that is how most of the apps work as well. As long as you us one which you are, it should be good.
It’s good that you are following one app. How is iWallet ?
@Radhey Sharma, I started using it last month and really like the software. It is very easy to use, stable and serves my purpose perfectly well. Ofcourse, the onus is on the user to enter his expenses on a daily basis!
@Abhilash, Which s/w is this – perfios or ICICI Money Manager ?
@Radhey Sharma, The name of the software is iWallet. It is a mobile app for Andriod OS based mobile phones. You can go to https://market.android.com and search for “iWallet” to get more details.
@Abhilash, There could be other softwares as well in the market for mobiles for the same purpose. As you mentioned, the key is to enter the data correctly and consistently every day. Nice to know you are managing your personal cash flow on the move.
There are so many ways to do it. But the thing is consistency and the urge to maintain the data.
Excel is the simplest way though.
@Manickkam, Simplest but time consuming !
@Radhey Sharma, If you have a good template with the correct charts, the time taken to enter data alone would consume your time.
And if you know shortcuts in excel, it would be a real time saver. Of course, it can be made to have a great UI as well. Good dashboard. It all depends on what data you are looking for.
If the template is not that good, it would be time consuming to even enter the simplest of data!
I use Intuit Money Manager. It is an excellent tool to track your budget. You can link your various savings/creditcard account. If you are in the habit of paying your monthly bills via Netbanking enabled Bill pay option then the tool will automatically categorize your expenses and display this in a easy to understand pie chart. You only need to manually account for your cash spendings.
The problem with tracking your expenses using an excel sheet/manual way is that it is easy to miss out some of the transactions if you are not accounting for it on a daily basis. I am sure most of us would find this as a difficult excercise to perform on a daily basis. If you use any of the online tracking software it will be directly linked to your account and the tool performs automatic categorisation of the expenses.It will also remember how you have categorised a previous transaction and if the same transaction happens in the subsequent month the tool will automatically categorize it. Therfore you don’t have to account for your MF SIP as a savings category every time. You can set up reminders for payments ( such as Credit card payment, mobile payment etc). I haven’t faced any issues with respect to online security while using Intuit money manager.
@Shanil, This is exactly how most of the online money management tools work. Great stuff.
@Shanil, Nice to know the advantages of Intuit Money Manager.
@Shanil,
Thanks for inputs on Intuit money manager, had got a free trial but did not go for it, happy with the good old Excel.
But someday will give a try to these softwares, Radhey too suggested.
Rakesh
The general formula for savings is: –
Savings = Income – Fixed expenses – Discretionary expenses
A lot of time is utilised in tracking discretionary expenses so that savings and investments can be increased to meet the end goals.
Let me put another perspective to it and twist the traditional formula: –
Discretionary expenses = Income – Fixed expenses – Savings
The above formula will ensure that your fixed expenses and investments are taken care of and you spend on movies/shopping/dining, only what you are left with. This way you dont need to track your expenses because you are blowing away only the surplus cash. It requires some discipline but its for your own good.
I personally follow this and have never tracked my expenses. My income is fixed, my fixed expenses [of course there is always some contingency] are fixed and my savings/investment is fixed. I enjoy with my balance funds without worrying about anything.
@Vivek K, Good good, I will collate your comments into a post for sure Vivek !
So essentially, you first save, then spend (fixed or discretionary).
If yes, I follow the same approach !
@Radhey Sharma, Slightly different, I first spend on fixed expenses, then save and then spend on discretionary expenses.