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Take Control Of Your Finances

by Jeff Davidson    

In 1947, Ladies Home Journal polled thousands of American households and found that 70% of all of their worries were in regard to money. In five decades, little has changed.

Chances are excellent that you face some real challenges when it comes to getting your finances in order. All of our lives, it seems we're confronted with a bewildering array of rules and instructions for living and succeeding in this world, nowhere more so than when it comes to personal finances. The confusion about what to do with what you earn may account for some of the reason why your savings and investment accounts aren't larger than they are.

Sure, I Want to Be Well Off

Most people want have enough money to live comfortably and to reasonably be able do what they when they want to do it. If you poll people on their financial goals, the issues that come up most often include buying a new home, providing for their children's higher education, and having a productive, prosperous retirement.

Yet longitudinal data from the Social Security Administration reveals that such "goals" are probably closer to wishes or fantasies.

U.S. Social Security Administration data from 1990 reveals that 87% of Americans retire with less than $10,000 per year to support them, and 50% have less than $5,000 per year. The average person between the ages of 45 and 54 has only $2,300 in assets. By retirement, the typical person's assets will have grown to just $19,500. Less than 50% of Americans are able to participate in a company pension plan, and the average annual private pension payment is well under $5000. Concurrently, employee pension benefits are decreasing.

Medical costs are increasing, and life‑spans are increasing. Most elderly people spend from 3 to 5 years in a nursing home or needing home care with average annual costs of $32,000. By age 65, 75% of Americans are dependent on relatives or charity. Meanwhile, Social Security benefits are decreasing overall!

Since Lyndon Johnson financed the Vietnam war without raising taxes, as a country, we haven't been able to live within our means and sustain a pay‑as‑you‑go system. Unfortunately, this type of mentality appears to have taken hold throughout our culture.

Concern, Yes; Action, No

It seems that there is far more concern about finances than about goal‑ attaining behavior. The Gallup poll found that 57% of successful baby boomers between the ages of 30 and 50 in the Rocky Mountain states reported that finances "are their top retirement concern" and that 92% said "they believe social security will be inadequate to provide their retirement financing." Yet 43% said they are not contributing toward a retirement plan, and 25% said they had no plans at all!

Stopped in Your Tracks

Among the legion of excuses that adults offer as to why they have not set — and hence will never reach — financial goals, these surface often:

* "My company offers good benefits," so I don't need to do anything.

* "I have no confidence in making financial decisions," so, presumably, I'm excused.

* "I did some investing once and got burned..."

* "I don't trust financial advisors; I have hard evidence that each and everyone of them are crooks."

* "The amount I have to save would buy a pack of bubble gum."

* "Who's got time?"

* "Retirement is just too far away to think about."

Happiness is a Positive Cash Flow

Suppose your financial goals are to get out of debt, build your savings account, have money for emergencies, pay taxes as required, and maybe get a new home? Other goals may be to have adequate insurance in the case of loss, invest for your child's college, and contribute to your retirement fund. Where, oh where, do you begin?

On the path to getting in control and then mastering your finances, achieving a positive cash flow is as good a starting point as any. A positive cash flow is as important for a family as it is for a business.

In the 1970's, when inflation was high, and in the 1980's when taxpayers were able to write off the interest on debts, it made financial sense for some people to be in debt. Things were going to be more expensive if you waited to buy, and the interest you paid on acquisitions was deductible. With relatively low inflation and reduced tax deductions for the interest on debt, it is no longer prudent to be in debt.

In the Red or in the Black?

Being debt free and maintaining positive cash flow is a worthy and valid financial goal of many people, including you. Fortunately, determining if you have positive cash flow is simple. First, list all of your income for a typical month. Don't forget stuff like that you'd rather forget. Then, add up all of the dollars that are going out the door every month for your mortgage payments, insurance, housekeeper, kids' expenses, medical expenses, etc. Are you in the black (a cash surplus) or in the red (in debt)?

Chances are that if you work with PC and know how to run spreadsheet programs, you already have the skills to produce your own detailed cash flow analysis.

Cash Flow Planning 101

In short, a well developed cash flow projection shows the timing and magnitude of your cash needs. If your cash flow shows deficiencies for any given month, beware‑‑that is when you're most likely to rely on credit card debt, delayed payments (along with late payment fees) and other costly maneuvers.

Hopefully, your cash position at the end of each month is positive. The assumptions you make about your projected cash inflows and outflows are as important as the actual figures themselves. It is not difficult to produce a detailed cash flow projection off by ‑‑ yikes! ‑‑ thousands dollars. While the software spreadsheet programs can help simplify calculations, there is no substitute for plotting inflows and outflows as carefully as possible.

Here is an explanation of the various components of cash flow:

1. CASH ON HAND

Beginning of month ‑‑ cash on hand equals cash position previous month (7).

2. CASH INFLOWS

Salary Commissions

Fees

Bonuses

Alimony or child support

Entitlements

Other monthly inflows

3. TOTAL CASH RECEIPTS

Receipts for all of cash inflows

4. TOTAL CASH AVAILABLE

Before cash out (1+3)

5. CASH OUTFLOWS

Mortgage or Rent

Utilities

Car expenses

Food

Medical payments

Clothing

Insurance

Taxes

Interest

Other Expenses

Miscellaneous

Subtotal

Loan Payment

6. TOTAL CASH PAID OUT Receipts for all cash paid out

7. CASH POSITION

End of month (4‑6) ‑‑ enter this amount in (1)

Cash on Hand following month.

Now the great part‑‑with a positive cash flow, you can readily identify how much money you can save each month. Some people will spend any cash surplus that they have. I'm hoping that you're not among them. When you find that you can't hold on to a surplus, have the money automatically taken out of your income each month .

Underestimating and Overestimating

Like in a business, it makes good sense for you to overestimate your expenses and underestimate your income; this will keep you in a safety zone. When you're in a positive cash flow situation, even after you've allocated a sum for savings, allow for emergencies.

For example, if you get into a small accident and your insurance doesn't cover the deductible, you can afford to pay the damages. Beyond that, strive to establish emergency funds equal to 3‑6 months of actual living expenses. It's a tall order, but sound advice.

An emergency fund is one of the fundamental building blocks to any solid financial plan. The more uncertain your finances are‑‑for instance, if you work on commission, own your own business, or are an independent sales person‑‑your emergency funds are more important to you!

Once you've charted your earnings and spendings, you're ready to plan your savings, and will be well on your way to a more financially secure future.


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Jeff Davidson, MBA, CMC, is a popular conference speaker and author of 28 books, including Breathing Space (Feb 2000). For books, videos, cassettes, or presentations, visit http://www.BreathingSpace.com, FAX (919) 932-9982, or call (919) 932-1996.