February is a great time to examine our household Cashflow. The Holiday season is firmly in our rearview mirror so we can begin to focus on what we want to accomplish for the year. Plus, it is early enough in the year that we have an opportunity to make a significant impact to how we save and spend our hard earned money. Below are 5 tips to help you improve your cashflow for 2023.
1. Make savings a priority
As a rule of thumb, I recommend that you commit at a minimum 10% of your annual household gross income to savings. If you can save more than 10% even better. This sounds great but how should you prioritize this savings?
First, examine your cash reserves. You should have an initial cash reserve that is equal to the greater of 10% of your household income or 3 months of fixed expenses. If your Initial Cash Reserve is below the necessary amount, then I would prioritize replenishing your initial cash reserve. If you are a homeowner, you should also have a secondary emergency fund.
Second, target savings for retirement. Start with allocating 10% of your gross income towards retirement. If that is not possible, strive to at least contribute up to your company’s matching percentage. If you can contribute more than 10% even better. In 2023 the maximum amount of money that can be saved in a 401K plan has been increased to $22,500 per year plus an additional $7,500 if you are over 50 years old.
Third, review what your financial commitments are for the year. For most homeowners, their largest financial commitment aside from the monthly mortgage is semi-annual property taxes. The other big spending item are vacations. Set aside savings now to make sure you have the funds available for your big spend commitments so you do not have to rely on credit cards.
2. Prepare an annual cashflow statement.
This exercise will you determine if you are saving or spending more than what you earn. Knowing this will help you determine your overall financial health.
a. Determine your expected annual net household income. For wage earners this is your net paycheck multiplied by the number of pay periods plus other expected income like bonuses and other compensation. For retired individuals this would include your monthly social security, pension, and required minimum distributions. If you are a business owner, this is bit more challenging as you have to estimate what your expected net profit will be for the year. In addition, determine your other sources of income: bonuses, rental income, stock based employee compensation.
b. Review your fixed expenses. Knowing what your fixed expenses are will help you determine how large your initial cash reserves should be. It will also help to know at a minimum how much money you need to set aside to pay your necessary expenses. What are fixed expenses? They are spending activities that occur on a regular basis (monthly, quarterly, semi-annually, or annually). This includes your mortgage or rent, utilities, insurance, groceries, and fuel. The monthly amount could be the same or they can vary. Calculate the expected total fixed expenses for the year and divide by 12. This amount is your average monthly fixed expense and can be used to determine what your initial cash reserve amount should be.
c. Review your expected discretionary expenses. These are spending activities that you are not obligated to make but rather you choose to make them. Vacations, clothing, restaurants, and entertainment are examples of discretionary expenses. If you need to find ways to reduce expenses so that you can live within your means or wish to save more, the discretionary expenses are the first place to start.
d. Take your expected annual income and subtract your fixed and discretionary expenses. If the amount is positive than you have a net surplus. With a net surplus, the question is where do I save this net surplus and how to put it to the best use to meet your goals. If it is negative than you are spending more than you make and adjustments will need to be made to your spending by examining your discretionary and fixed expenses.
3. Utilize budgeting tools and programs to get better organized.
On-line budgeting programs like Quicken, Mint, and YNAB are readily available and popular tools. Looking for the most comprehensive and complete cashflow management tool? Choose Quicken. Excel is a low tech but highly effective tool in helping you gain a better understanding of your spending. If you are a client of Attune Financial Planning, you also have a couple of tools at your disposal to help you gain a better understanding of your finances.
a. eMoney Spending. Integrated within your eMoney website, you have the ability to track all of your income expenses. When you link your bank accounts and credit cards with eMoney, all of your transactions are automatically downloaded into your eMoney Spending for your review and analysis. You also have the ability to create a monthly budget that can help you stay disciplined; especially if you need to reduce your spending.
b. First Step Cash Management. This is a wonderful tool that can help you review your total cashflow activity and determine if you are experiencing a monthly surplus or a shortfall.
4. Automate the payment of your bills.
I recommend that you set up automatic bill pay so that all your bills are paid through one credit card and / or one checking account. This method ensures all your bills are paid on time and reduces the need to write checks each month. If you are in a position to pay off your credit cards in full each month, I recommend all bills be paid from a credit card. This method makes it easier to manage your expenses plus you are able to receive cash rewards or points. The credit card should then be automatically paid in full each month via your designated checking account.
5. Make it a commitment.
Make it a point to sit down (with your spouse or partner) to reconcile and review your spending regularly. I recommend that you set aside one day a month to go over your budget. Preferably choose a quiet time on the weekend and make it a habit.
As I said February is a great time to review your cashflow so that you can make the necessary adjustments to your emergency fund savings, retirement savings, and other savings goals. Reviewing your cashflow will also help you determine how financially healthy you are. If you are spending more than you make, now is the time to make changes so that you do not fall into credit card debt.
Do not hesitate to reach out to me for more information on how I can help you improve your cashflow in 2023.
This content is developed from sources believed to be providing accurate information and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.