PERSONAL FINANCE

Financial Planning
Retirement
Insurance
Cash Flow
Investment Planning
Taxes

Cash Flow/Budgeting

For many individuals and families, preparing a personal budget is the most effective and direct way to control family finances and meet financial goals. This applies as much to the family living with below-poverty level income as well as those families with six- and seven-figure incomes.

What is a budget?
A personal or family budget is a simple plan showing how much income is coming in and how much is going out for a given period of time. By looking at this data, the individual can plan and prioritise those expenses that are most important to meeting his or her goals.

What are the benefits of budgets?
There are several benefits from family budgeting but none more important than giving the family the knowledge of where and when their money is coming and going. A budget will enable an individual or family to estimate more effectively their income and expenses and makes them more conscious of the money that must be set aside to meet future expenses. The individual or family will learn to allocate available funds among specific expenses and estimate what may be left for savings, investments or repayment of debt. In any case, a budget can help one identify alternative ways of spending that can lead to additional savings. This is especially true in the case of debt and credit card obligations, where a budget can help clarify alternative strategies to reduce debt.
Knowing whether and how much more income is coming in than is going out, or vice versa, is the first step to being able to set realistic, measureable, financial goals.

Another benefit to family budgeting is that it gives the opportunity for family members to discuss their feelings about money and their own financial goals, both short- and long-term. This is especially useful when there is existing tension or resentment between family members about money and spending.

Where do I start?
Unfortunately budgeting is not something that most individuals ever study in school and often do not learn from their parents, so many individuals and families don't know where to start to address the problem. The important thing is to start the process. The best place to start is with your family, sitting down and talking about the situation and perhaps preparing a family budget. For those with significant debt or credit cards, a good place to begin is by ordering a copy of your credit report from one of the major credit reporting agencies (Experian, TransUnion, Equifax.) Depending on your situation, the appropriate next step might entail contacting a competent financial advisor or perhaps a credit counseling organization such as the National Foundation for Consumer Credit, Myvesta, or a local Consumer Credit Counseling Service (CCCS) agency. Even if it's nothing more than balancing the checkbook and categorizing a few expenses, any of these actions should be time well spent that should bring better enable you and your family to define and achieve your financial goals. As you prepare or update your family budget a few items to keep in mind are listed below.

Some basic ideas on budgeting
Although no budget will be the same for any two families or individuals below are a few rules of thumb that might be useful.

1. Start by looking backward, not forward. For at least a month or two, track and right down every purchase you make. Use a notebook, your checkbook, and bank statements to see where every dollar is going. At the same time, look at your household income-not your gross salary-but your actual after-tax paycheck, dividends, rent checks, etc., that you either cash or deposit in your bank. Even though these may seems like tedious and time-consuming tasks, the long-term benefits will far outweigh the costs, and it will be time well spend.
2. The budget should be developed with reasonable goals in mind. For example, if savings must be increased to provide funds for a child's education, then either other budget areas must be reduced or there must an offsetting increase in income.
3. Although budgets can be planned on a weekly, monthly, or annual basis, many experts suggest a time-frame equal to the period between the major receipt of income-a weekly budget if the majority of income is weekly, a monthly budget for those with a large income once a month, etc. However, depending on your individual situation, it may be useful to have both a monthly and yearly budget, for example.
4. There should be a certain amount of flexibility given for budgetary expenses, especially from week-to-week or month-to-month.
5. Priority for expenses should be given to: Fixed expenditure, such as rent or mortgage payments, life insurance premiums, and installment loans; followed by variable but high-necessity expenses such as food, clothing, & transportation; and then with discretionary expenses, such as travel, leisure, entertainment, etc.
6. Savings and/or debt repayment should be a very high priority and above discretionary expenses
7. There should be agreement among family members as to the priority of financial goals. In this way, each family member will be more willing to "do his or her part" to maintain the overall budget.
8. Adequate records should be kept to track past and future spending patterns.

• Whenever possible, pay with cash. Although this seems extremely basic, simply limiting your daily spending to what's in your pocket or your bank account will make you more conscious of the tradeoffs between what you'll gain (your purchase) Vs. what you'll lose (your dollars). As everyone knows, it's infinitely easier to sign one names on a credit card receipt knowing you can worry about the expense a month from now, than it is to pay with a limited amount of cash.
• Instead of using a credit card, consider a debit card, which automatically takes money from your checking account account the same way a check does (but with more convenience.) Besides limiting your spending to what's in your checking account, it also makes it easy to track your spending during the month.
• Limit your use of the ATM. Banks are increasingly relying on customer fees to fatten their profits. Some customers are now even charged transaction fees to use an ATM from their own bank. And with the average charge now about $1.50 per transaction, the use of the ATM should ideally be used only in emergency situations. If you are relying on the ATM to finance your day-to-day transactions, this might suggest that a little budgeting or planning is necessary. By doing so, you'll be able to better estimate how much cash you'll need to get you through the day or the week.

David Alan Pace, CFP, CFA, EA, Pace Financial Services

This document is for information purposes only. No part of this report may be reproduced in any manner without the written permission of Pace Financial Services. The views and opinions expressed in this report are not intended to serve as specific investment or financial planning advice or recommendations, and individuals should discuss their specific financial goals and available options with a professional advisor.