Budgeting and Cash Flow
By: Joe Barbieri (Joe the Investor)
Summary
This series has described budgeting in 2 main parts. The first part is building your budget accounting for the income sources and expense sources which can be fixed or variable in nature. The budget is broken down into parts that you can control in the short term and parts you can control in the long term for you to see your options in adjusting your budget. The second part of the process is how to make changes to your budget and how to examine its various parts. The changes range from something incremental to a major life decision that can change many aspects of your budget. Much of this is scenario specific as in what parts of the budget get changed are driven by what situation you find yourself in. An extension of making changes to your budget is your money psychology, mindset and habits which underlie your decision process when it comes to money. A budget is a small scene that is part of a larger picture which is your financial situation. As you become more acquainted with the process, you can become the sovereign of your budget and cash flow!
How to Build the Budget
A budget is like a clip from a movie at an awards show. It’s a small scene that is part of the larger picture. A financial plan looks at the long term, encompassing your goals, preferences, circumstances and important life decisions. The budget is a snapshot of that plan that zooms in on a sub-period to see how the plan is going. As you move through time, you can zoom in on the details of the budget for a specific time period, and then zoom out to see how it fits with your overall plan.
This article series is designed in sections so you can focus on what is needed for your situation so you can zoom in where you need to and gloss over what you don’t need or already have. The analogy is the annual check-up with your doctor within the lifetime of your overall health. The budget is asking the “How am I doing at this moment in time?” and then looking at the long term and asking “What is this telling me about my money long term?”
The budget itself is composed of 2 main parts – money coming in (revenues) and money going out (your expenses). One of the central parts of successfully managing your personal finances is to live within your means, and your budget is what helps you determine if you are succeeding at that. Your means is the revenue piece, and comparing that to the expenses piece tells you if you are living within your means.
It used to be that budgets focused only on expenses, because job security was common and revenues were stable. This is no longer the case even if you have a “full time government job” because mass layoffs, downsizing and instability are now normal in the workplace. The 3 main types of income that this series covers are employment income, entrepreneurial income and retiree/investor income. A fixed income scenario like a disability pension can also be put into the retiree category. Realistically, a person will go through all of these income types and will likely combine them at certain points of their lives.
Budgets represent that balance between your income and expenses over a period of time. A budget spanning a year is recommended and very common, but there could be sub-periods like monthly or quarterly if this is useful, and budgeting for each paycheque can be useful for staying on track. Over these periods, you will notice patterns of income and expenses which will provide insight as to where your money is going and for what reasons.
To build your budget, you will need to determine those two main components: how much money you have coming in, and how much you have going out. The specifics for each are discussed in detail in the rest of this series..