WealthStone 101 – Part 2: Cash Flow Management
If the building blocks of net worth are People at Work and Money at Work, then Cash Flow Management is the complementary puzzle piece. If your living expenses exceed the money that you are bringing in, chances are your financial picture is not improving. Living expenses can be broken into three categories: Fixed, Variable, and Discretionary.
Fixed: These are the expenses that are the same month-in, month-out. Think about your mortgage, car payment, cell phone bill, or student loan debt. There are sometimes actions that can be taken to decrease these bills (like refinancing at a lower rate), but they are consistent each month.
Variable: These bills may change from month to month but still need to be paid. Your grocery bill may fluctuate from month to month, but you still have to eat. Same goes for the gas for your car, utilities for your home and home goods. They may go up or down depending on the time of year, but they are expenses you know you will have to satisfy in order to live the life to which you are accustomed.
Discretionary: You have the most control over discretionary expenses. How much do you spend on clothes, going out to eat or entertainment? All of these are good things and part of a balanced life, but when the budget gets tight, these are the expenses that need to be evaluated and reduced.
It is necessary to know where you are spending your money simply from an awareness perspective. Perhaps spending habits need to be changed, perhaps not. But in order to make sure that you are spending your money to meet your priorities, it is helpful to know where your money is being spent. Are you controlling how you spend your money or is how you spend your money controlling you? A financial advisor may be able to help you make decisions to reach your goals.