As a young adult, you’re just beginning your professional and personal journey. You may be fresh out of college, perhaps carrying some student loan debt. Maybe you’ve already got a foot on the career ladder. Perhaps you’re renting an apartment on your own, sharing space with friends, still living at home or already own your own home. The concept of financial planning may seem a long way off right now, something your parents do, not you.
Financial planning, however, doesn’t need to be either daunting or stuffy. Understanding and implementing sound cash flow management is the cornerstone of financial planning, and you may already be doing it in some form or another.
Cash Flow Or Budgeting?
Whether you call it cash flow management or budgeting, this core financial element is the single most important money fundamental you need to understand. Learning how to manage your cash flow will help you achieve financial security, both now and in the future.
The All-Important Equation
Basically, cash flow management comes down to a very simple equation: What comes in each month (income, usually in the form of earnings) must end up being more than what goes out (expenses, also known as expenditures).
INCOME – TAXES – EXPENSES = LEFTOVER CASH
Successfully balancing your expenditures relative to your income each month allows you to accumulate money. You can use the excess money to build savings and investments, the two building blocks of wealth. Our article for Millennials about setting financial goals will help you decide how to allocate your remaining monthly cash by defining your short and longer term savings goals, e.g. an emergency fund, a down payment for a house or saving for retirement.
Developing A Budget
In short, spend less than you make!
To do this, you need to define and implement a monthly budget. Here are some things to consider:
- Set a reasonable budget that’ll help you meet your financial objectives, but not one that’s too restrictive to live by.
- Be conscious of your spending decisions, yet allow for flexibility and the occasional splurge.
- Identify underlying patterns of money behavior, positive or negative, that could help or hinder your financial success. (For related reading, see: Money Habits of the Millennials.)
- Understand your broader relationship with money. Your attitude towards money will have formed during childhood as you watched how the important adults in your life dealt with finances. Your outlook towards money will influence your spending and saving as young adults and later in life.
- Take account of recurring expenses, like healthcare costs, student loan repayments, or insurance premiums. You may need to manually calculate the monthly value for annual, semi-annual or quarterly costs like car insurance.
- Budget for big ticket items, such as vacations or a new TV, instead of financing these expenses on credit cards.
- Plan for non-recurring expenses, such as emergency car repairs, moving expenses or even attending your best friend’s destination wedding.
- Don’t forget taxes at both the federal and state level, if applicable.
- Use technology to help you stay within budget, with apps and programs which automatically collate all your transactions in one place, helping you to stay within budget. (For related reading, see: 4 Best Personal Finance Apps as of August 2017.)
- Routinely track your spending and saving. Check your budget several times a month to increase your chances of success.
- Always pay off your credit card bill each month.
- Pay yourself! Be sure to allocate a portion of your monthly budget toward long-term savings, through your employer's plan as well as outside savings. The amount you pay yourself might not be the biggest line item in your budget, but it is the most important one!
Cash flow management doesn’t have to be painful, time-consuming or boring. By following these simple budgeting recommendations, you can define, develop and implement your very own financial strategy that meets the needs of your current lifestyle while also supporting your future life and wealth objectives.
Your money is an important resource in helping to realize life success, so the sooner you begin managing your income and expenditures, the quicker you’ll begin to accumulate savings and investments towards your longer-term financial goals.
(For more from this author, see: Is Maxing Your 401(k) Contribution Enough?)
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