(#1 – Cash Management)
“Financial freedom is available to those who learn about it and work for it.” — Robert Kiyosaki
With all the Philippine economic indicators going haywire – rising inflation, depreciating peso, increasing fuel prices, worsening unemployment/underemployment, etc – how financially secure and confident are you to face life’s uncertainties? In the same token, how are you preparing the younger generations in your family?
Whether we like it or not, it’s becoming more obvious how vital financial planning is. We just cannot leave our financial future to chance. Nor can we rely on our government . We need a clear roadmap for achieving our financial goals, managing money, and preparing for unexpected emergencies.
An effective financial planning considers the four foundations of cash management, debt, management, risk management and wealth management. As each one is important, I thought of discussing one foundation at a time so we can look into it with more details.
Let’s start with cash management, which includes budgeting, saving, tracking and optimizing your cash flows. The goal of personal cash management is to control your money flow, ensuring financial stability and emergency readiness.
Track your expenses. As they say, ‘it’s not your salary that makes you rich; it’s your spending habits.” Thus, in managing your cash flow, it is a must to track where your money is going. List down all of your expenses, big and small, for the month. Categorize them as either fixed expenses referring to costs that stay the same every month like rent, mortgage payments, utilities, internet, insurance premiums, and subscriptions; or variable expenses- those that change month-to-month like groceries, dining out, entertainment, and gas/transpo; or discretionary expenses pertaining to occasional wants or irregular bills like shopping, vacations, gifts, and hobbies. Doing this will allow you to identify where your money is spent on and where necessary cuts can be made. You might be surprised what your categorization will reveal!
Follow a Budget. After identifying where your money is going and where cuts can be made, set and follow a budget. And stick to it. In setting a budget, you may follow the 50/30/20 rule: 50% of money to your needs (food, rent, utilities, transportation), 30% to your wants (entertainment, travel, shopping) and 20% to your savings. Another rule of thumb in budgeting: Income – Savings = Expense. What’s left after savings will be our budget for our needs and wants. However, in practice, it’s usually: Income -Expense = Savings. No wonder why many Filipinos end up having very little or no savings, at all.
Increase your income. While reducing your expenses is a sure way to manage your cash flow, you can only cut your expenses by so much. The other part of the equation is increasing your income. You can do it by looking for a higher paying job or creating multiple income streams. Improving your knowledge and skill set will empower you to ask for that promotion and salary increase in your current company or seek for better paying job somewhere else. Nowadays, having side hustles is a common thing. Many have their fulltime jobs during day time, but after work, they are either on-line seller, delivery rider, tutor or virtual assistant. Having a single income source is becoming an exception than the rule
Build and automate your savings. Many Filipinos believe that saving is important but they lack the mindset, discipline and consistency to save. Or sometimes, they immediately aimed for big numbers, realized they cannot sustain, got disillusioned in the process, and eventually stopped. If P50 is only what you can afford to save at the start, it’s okay. Just do it consistently. When you see that you’re building something, you will, later on, have the confidence to increase it to higher amount. To help you, look for platforms that can automate your savings. You can talk to your HR or payroll officers so that they can facilitate the auto transfer of money from your payroll to savings account, even before your salary reaches you. In savings, it’s not the amount, but the discipline that matters.
Do a regular checkpoint. It’s not enough that you plan and budget at the start of the year. Only to realize by the end of the year that you are so far from what you have set. Doing a regular review will enable you to know what’s working and what’s not. Once you see that it’s working, you will have the confidence and motivation to continue and do more. At the same time, it will show you what’s not working and the adjustments to be made. What gets monitored, gets done and delivers results.
Now that you have an idea of how to manage your cash flows, we will tackle on the next issue of Mindful, the second foundation of financial planning… Debt Management.
