After reading an article called 11 Steps To Financial Freedom in the latest MoneySense magazine, I thought it would be interesting to go through each of these steps one-by-one and share my results on this blog. Each week I’ll go through one of the 11 steps to financial freedom, with the intention of creating a complete financial plan by the end of the series.
Over the past two weeks I have prioritized my goals and determined my net worth. Now it’s time for step 3: record your cash flow.
Track Your Spending
According to the MoneySense article, the key to building a strong financial plan for the future is to understand how much you spend and save right now. This is called tracking your cash flow, and it can give you a sense of control and confidence that makes it easier to make financial changes in your life.
Before deciding that my wife would stay at home full time to look after our daughter, we started tracking our spending to find out if we could afford to live on one income. This was one of the best financial decisions we ever made, as it not only allowed us to trim a lot of excess spending from our budget, but we were able to start planning for the future by forecasting our income and expenses 12 months in advance.
Action Step #3 – Record Your Cash Flow
Part of this series included 10 worksheets in the Money Financial Plan Kit. For this step I used worksheet #4 – Your Spending and Saving, which shows what money is coming in (wages, interest, government benefits) and what’s flowing out (rent, debt payments, utility bills). Fill in all your monthly expenses in column 1 and your annual expenses in column 2.
Add up your expenses in both columns and subtract them from total net income on both a monthly and yearly basis. The result is your cash flow deficit or surplus.
A Worthwhile Exercise
If I hadn’t diligently tracked my expenses for the past 2 years, this step could have really delayed my goal of developing a complete financial plan in just 11 weeks. In order to get any meaningful results from this exercise I believe you need to track your expenses for at least a year.
My personal budgeting spreadsheet has 75 spending categories, which I’ve customized for our own situation. The point is, it takes time to uncover spending patterns and to understand the complete picture of your income and expenses over the course of a year.
Some people feel like budgeting and tracking expenses is a waste of time; that once you pay yourself first it doesn’t matter how you spend the rest of your money. I think that’s a mistake, especially if you haven’t gone through the exercise before.
Even though I have a fairly good handle on our monthly spending, there are always new scenarios coming up in life that create the need for changes in your finances. Buying a new house, having a baby, changing careers or dealing with an emergency can all lead to adjustments in your spending and saving habits.
Next week we’ll look at adjusting our spending after completing Step 4: Compare Your Spending To Your Goals
