WHY BUDGETING ISN’T THE ANSWER
Do you often wonder where all your money goes and then feel under stress when facing unexpected bills? Shane West explains why cash flow is the best place to start
Healthy finances are important to families not only for their financial wellbeing but because it flows through every other aspect of life.
Money woes are one of the biggest contributors to problems in the household.
What if I told you it’s not the money, or lack thereof, that causes these problems. It’s the stress associated with it. Let me clarify what I mean.
In our business, we have many couples come to us in a high state of stress. How that manifests is often eerily similar. There is pressure on their relationship, nights are sleepless and the future is uncertain. Sadly, even their physical health and wellbeing has started to slip.
However, the one thing that can widely vary between different couples is their levels of income. Some families have humble salaries and others make the kind of money most only dream of. The amount of money they earn isn’t the source of the stress, nor would earning more necessarily solve it. A lack of management is the culprit.
Some good news though. Taking care of this is relatively simple and well within the capability of most families.
Cash flow not budgets
It’s hard to imagine less enticing words than cash flow and budgets, but hear me out on this one.
Many people think that good financial management centres around budgeting. It is true to say that setting limits is important. That is budgeting.
But budgets have connotations of restrictions and reducing your control. No-one wants to live their life like that and nor should they.
Cash flow, on the other hand, is about putting simple controls in place to understand what money you have coming in, and when; and what money you have got going out, and when.
When we have introduced this simple concept to couples like those I’ve mentioned above, it has changed their lives.
Managing cash flow
People who understand this cash flow concept most often have lives that are free of financial stress.
Not only that, this little bit of understanding creates a platform for them to be in control, able to do the things they want, and even invest to get further ahead. Again, income isn’t the defining factor.
To manage cash flow you will need some sort of a system to capture what your income is, what your likely costs are and when all of this will hit. This system could be as simple as a notepad in your kitchen drawer, through to an app on your phone or assistance from a financial planner.
The important part though, is that it’s captured, understood and managed.
Spending what’s left after saving, not saving what is left after spending
Everyone knows that you shouldn’t spend more than you earn.
In a sense, that concept is just a hand-to-mouth budget. To better manage your finances, you should keep track of how much of your income is left after you have paid your bills and how much of it you intend to put into savings.
Understanding what you are building in savings is important because it gives you the confidence to handle your future financial needs.
If you know and have planned for a significant bill that is coming down the line, such as your car rego, you will have it covered without a second thought. It’s in the plan. Not only that, you will probably have planned for that family holiday that means so much. Furthermore, having those savings built can very quickly eliminate the massive stresses associated with larger unexpected costs that rarely, but inevitably, do occur.
Changing habits to gain peace of mind
You will have noticed the catch. To have savings accumulated you’ll have had to give some stuff up along the way. That sounds awfully like a budget. But it is different.
The beauty of managing your cash flow is that you can make better decisions about the real value of the things you buy.
For example, on a shopping trip you come across a pair of sunglasses that you have to have. You haven’t budgeted for them, but you know you can cover their cost regardless of what’s ahead. They make you feel great. Arguably, that was money well spent. The very same pair of sunglasses could be nothing but a source of anxiety if you are unsure of your future cash flow position. In this case, buying the sunnies was probably a bad financial decision.
Obviously, I’ve only covered the very basics here. But I encourage you to have a go at managing your cash flow, even if it is just the pad and pen approach. You will get the hang of it and the payoff will be putting yourself in a position where money isn’t a cause of stress. It will become a source of opportunity and give you the freedom you deserve.
Before I sign off, I thought I should share a little bit of inside knowledge. My business partner, Ryan Fennell, is actually our financial adviser and Sam, my wife, and I do it for the same reasons you should. I used to set our budgets at home and then a few weeks later turn up at home with a new bike and proceed to tell Sam some story about how it works with the budget, after I reworked it! Sam also used to pray she’d get home to meet her online parcels at the door before I did. Now if I need a new bike we go to Ryan and he sets me back on track and, if I really want it, we plan for it properly. Oh, and Sam opens her parcels in front of me these days – guilt free!
Getting your cash flow right is critical and at Fennell West we love working with our clients to get them achieving their financial goals through our proven GPS Cash Flow Program. If you would like to know more, then we’d love to talk to you. Give us a call on 03 5557 3355.
Ryan Fennell, Shane West and Jarrod Owen of The Fennell West Unit Trust trading as Fennell West are Authorised Representative(s) of GWM Adviser Services Limited ABN 96 002 071 749, an Australian Financial Services Licensee, Registered office at 105-153 Miller St, North Sydney NSW 2060 and a member of the National Australia group of companies. Licensee No. 230692. Any advice in this article is of a general nature only and has not been tailored to your personal circumstances. Before acting on this advice, you should consider whether it is appropriate having regards to your personal objectives, financial situation and needs.