Establishing a budget is very easy to do. There are numerous budgets on the internet, some are free and some cost money. Even a blank sheet of paper can be used. The problem that most people have is living up to the expectations they set for themselves.
The use of a monthly budget can be very helpful when dealing with your credit. Finding out where you spend your money on a monthly basis can help when it comes to paying down those high interest credit cards and other loans.
The Cash Flow Management Model
Prioritize where your dollars go in a list.
1. Retirement *Here’s a TIP – Pay yourself first!!!
2. House payment
3. Car payment and insurance
4. So on and so forth…
Everyone’s list will have items in an order that is most important to them. Some lists may have one item and some maybe 20 items long; the point is to get it onto to paper so you can see everything. The goal is to create a long term financial benefit for you and your family.
Cash Flow Model Definitions
1. Develop a Cash Cushion – Items such as car problems and medical bills pop up without warning. If you can use cash instead of credit you will be better off down the road. 3 to 6 months of living expenses.
2. Get out of Non Preferred Debt – Non Preferred Debt is considered debt that you can avoid. Large ticket items such as cars and homes are considered Preferred Debt because you need a loan for these items. The point is so when you get paid YOU decide where your money goes. By deciding where you spend your money you are not controlled by having to pay on credit cards.
3. Significant Savings or Liquidity – A good rule to follow is having 6 months to one year’s salary saved. When you achieve this you are able to pay for “good stuff” such as vacations and investments. You also have a cushion in case of “bad stuff” such as job loss or a major medical expense.
4. Become Debt Free or Freedom Point – You should have your mortgage and all other liabilities paid off on your balance sheet. So in the event you had to pay off all of your liabilities, you are in a position to do so.
5. Retirement – This is the ultimate goal, but you need to start earlier to get there. We all have our own definition of retirement. I think we all can agree for arguments sake it is the ability to do whatever you want, whenever you want.
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