Family Budget & Cash Flow is cardinal in your Financial Plan

A personal financial budget/ family budget refers to allocating your income in a planned way towards the expenses like household, lifestyle, dependents, insurance premium, debt repayment, etc. The surplus is to be kept aside to build Contingency Fund first. Thereafter, investments are to be made towards future financial goals. Your family budget will be a part of your Financial Plan. You need to pen down your cash flow and tally it with your family budget at periodical intervals.

Cash flow as per family budget will lead to generate surplus for investments

Follow these steps for financial wellness

1. Note your net income (both earned and unearned)
2. Track your head wise expenditures
3. Maintain both primary & secondary bank accounts
4. Identify your goals with time horizon and quantify the goal amounts
5. Make a Financial Plan
6. Implement the Financial Plan
7. Reconsider your spending habits with corrective steps (Control measures)
8. Monthly review of your family budget & cash flow

Sadly, often estimated family budget is given casual attention by quoting rough estimates. Your approach should be more rigorous towards this aspect.

Family Budget is one of the backbones of your Financial Plan

As Certified Financial Planner in Kolkata, we always lay special emphasis on cash flow apart from considering the other significant factors of personal finance. We effectively focus on correlating actual cash flow with family budget. During interviews with our clients, we need to go off-track and undertake more detailed research in order to arrive at more accurate family budget. There may be 20% to 30% or even more errors while framing the family budget. This is quite commonly seen. While you furnish inappropriate family budget, the consequence is inaccurate outcome. You can never achieve your goals by chance/accident.

On the other hand, a cash flow statement reflects cash in (income) & cash out (expenses). Residual amount after meeting your fixed and variable expenses is to be channelized towards your specific financial goals.

Tally cash flow with family budget to arrest unwise expenses

Net Cash Flow = Total Income – Total Expenses should be as per Family Budget

Positive cash flow is ideal and you may have surplus cash for savings and investments, repayment/prepayment of loans etc.

Negative cash flow is a situation where the cash outflows during a period are higher than the cash inflows during the same period, i.e. deficit budget and you’re living beyond your means. To bridge the gap, often you may have to take secured or unsecured loan.

Neutral cash flow which hardly you can experience, i.e. what you earn and exactly what you spend in different heads. Therefore you’re ending up with zero, neither you have surplus nor you have deficit in the cash flow.

Once you know whether you have positive or negative cash flow, you can prioritize your financial goals.

Chart 1: Positive cash flow

Positive cash flow

Chart 2: Negative cash flow

Negative cash flow

Chart 3: Neutral cash flow (Break Even Point)

Break-even point

Family Budget means your projected income and expenditure during a predefined period. Cash flow statement measures your actual cash inflows and outflows in order to show you your net cash flow for a specific period of time. Cash inflows generally include salary, professional/business income, and interest from savings accounts and income from dividends etc. Cash outflows usually include household expenses, lifestyle expenses, commitments towards dependents, insurance premiums, etc.

As Financial Advisor in Kolkata, once we know whether you have positive or negative cash flow, we can analyse the situations and write action plans (a statement of the steps that need to be implemented to achieve a particular goal/target/objective).

A budget is unlike cash flow. A budget projects both how you allocate your cash flow. Monthly cash flow statement reflects how the cash flow was actually done. Accordingly, you can notice the difference between the projection (budget) & the actual amount as per your past records (cash flow). Thus, you can incorporate your actual income and spending pattern at the beginning of each month.

You must be disciplined. Your rational decisions can make a huge difference. It encourages you by fulfilling your financial goals. It also helps you to keep yourself on right track. You need lots of practice to be disciplined.

Follow budget & acknowledge your investments as your third child

You may look at it this way – if you have two children, acknowledge your investments as your third child. It’s better not to treat your investment as a step child. Your two children may not take care of your financial needs when you retire; but your third child (investments) will definitely generate passive income to meet your needs. Thus, there is a need to manage your investments prudently. As SEBI Registered Investment Advisor in Kolkata, we hand-hold our individual and family clients to prepare and stick to the family budget so that surplus funds can be invested to achieve your financial goals on time.

Secondly, we addressed it as “cardinal” You must be wondering why did we do so? In the family budget, you keep provisions for head wise monthly expenses like household, lifestyle, dependent, loan EMI, insurance premium, savings & investment. You need to prudently manage your cash flow as per family budget while you in your working phase of life. As you reach your old age/approaching stage, your accumulated fund will take care to meet all expenses. You have both fixed & variable expenses in your cash flow. Variable expenses may not be discretionary (optional expenses) in all heads, i.e. household, lifestyle & dependent. You can cut discretionary expenses (optional expenses) where you can identify.

As Fee Only Financial Planner in Kolkata, we believe that maintaining a family budget can influence spending habits. It encourages you to set financial goals and allow you to assess your actual spending patterns. Consequences are that you can take necessary actions before things get out of hand in your journey towards financial freedom.

You need to stimulate your financial status by identifying your loopholes/lacuna. Family budget & cash flow play a vital role in your personal finance.  As you start thinking rationally, you can do the budgeting practically. You’ll get your rewards while it reflects in your cash flow. Financially, you become independent at the intended time.

“Consider your means rather than list of demand.”