The New Year is upon us, and as always, the thought of a fresh start comes with it. Financially, how do you make this happen? This is the second blog in a series about cash flow. The focus on budgeting to help establish positive cash flow for the future begins now.
First and foremost the returns from paying off credit cards are not to be discounted. Interest is a big negative to your financial health. It is not deductible and overtime it eats away at your assets. You can’t get ahead if you are constantly paying in arrears. Remember when making your yearly budget that to make a budgetary line for gifts.
Cliché as it sounds, pay yourself first. Remove some money, before you see it. Transfer a set dollar amount into a gift account as a fixed budgetarye item. The most valuable thing is pre-tax savings for retirement. If you have access to an employer sponsored retirement plan contribute at the maximum In the final matched amount. Although this is not sufficient, in and of itself, for your retirement, it is the first step in on the road to financial security. Have no access to a employer sponsored plan, create an IRA with automatic deposits. As of 2019, a contribution of $7,000 can be made if you are over 55 years old, into an IRA.
An emergency fund, in the budget is not just a good idea, but can keep the budget afloat. Often small emergencies such as car repairs, home repairs, or health issues come as a costly surprise. Even the deductibles that seemed reasonable when buying the insurance can be out of reach if there is not fund to cover them.
Pets and children: who knew how much cute cost? So often the surprise of incidentals like a vet visit derails a healthy budget. Children’s activities come with not only health cost, but the added expenses of those costumes/uniforms and travel are the stuff of nightmares. The emergency fund is not just there for the obvious, but also the unexpected due to naivety when becoming involved with a new endeavor.
Other items that are predictable and can be budgeted by looking back to look forward. Sit down and take a hard look at what you spent last year and find the trends in your spending. Categorize these trends to the extent that you can and use this to predict what you will need to have for the coming year.
Sticking to a budget is not the goal, but it give a path of control in spending. Don’t give up on the budget just because you got off track. Adjust the other spending around the unusual expenditure. Once again your Certified Financial Planner can be helpful in creating a budget that works for you.
In the conclusion of the series, taxation will be the focus of creating positive cash flow. Knowing how to use your tax rates to your advantage gives you a leg up in predicting your cash flow.
Happy New Year from Prospero Financial Planning!