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FINANCIALLY AESTHETIC · GUIDE 01/37
INCOME, EXPENSES & CASH FLOW: HOW MONEY MOVES
FA-1.1 · The Money Operating System
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INCOME, EXPENSES & CASH FLOW: HOW MONEY MOVES
FA-1.1 · The Money Operating System
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START HERE
CHSHFLOW
What Comes In: Your Income
Let’s start by looking at your sources of income and your monthly expenses.
Step one: Add up all your income for the month. That’s the easy part.
Normally, you don’t have many sources of income. These might include employment income, benefits, or interest income, for example.
Add up all the funds you receive: salary, social benefits, scholarships, pensions, etc. Be sure to note the amount and, most importantly, the date you receive them.
To put these amounts in context: a salary is the amount received as compensation for work performed under an employment contract - that is, a contract between an employer and a worker. Gross pay is the amount the worker receives from their employer; after deductions, including social security contributions and various taxes, the net pay is calculated. A pay stub is the document showing the detailed calculation of a worker’s monthly wage and listing, among other things, the gross pay, social security contributions, withholding tax on earned income, various benefits, and the net pay.
Some income does not come from a job. Replacement income is the income you receive when you are unable to work due to illness, an accident, a disability, or unemployment. Guaranteed income is the salary to which a worker is entitled for a specified period if they are unable to work due to illness or an accident.
Regular and Irregular Income
Not everyone receives a fixed income every month. The following account from Clément, a student, illustrates how to manage this irregularity:
What’s Going Out: Your Expenses
Step 2: Add up all your monthly expenses.
Start with your fixed expenses - the ones that come up every month and are more or less always the same amount. Fixed expenses include rent, insurance, heating, phone, cable, and internet.
Next, calculate your variable expenses. These expenses can fluctuate from month to month. Examples include groceries, dining out, transportation, clothing, and entertainment.
The last type of expense is irregular expenses. These are expenses that don’t occur every month. For example: tuition fees, travel, car maintenance, gifts, and any other unforeseen expenditures.
A good budget should include these types of expenses. You can set aside an amount for these unforeseen expenditures - let’s say… $50 per month. You can also spread out an expense whose amount you know - such as tuition fees - over several months. That way, you’ll have already saved up the necessary funds by the time it’s due.
This same three-category classification is expressed as follows:
Identify all your expenses by classifying them into different categories:
- fixed expenses: these are certain and regular (rent, electricity, phone bill, health insurance, etc.)
- variable day-to-day expenses: these are essential for daily life (food, transportation, healthcare, clothing, etc.) and their amount varies from month to month
- occasional expenses: these can include small treats (going to the movies, booking a trip, buying a gift) or, conversely, unpleasant surprises (a broken refrigerator, a parking ticket, needing to replace car tires, etc.).
Olivier, a father of a large family, shares his experience on how to manage fixed expenses to gain clarity on the rest:
An invoice, a document issued by the seller or supplier, lists the services or goods provided and the amount the customer owes for them.
Needs and Wants: Categorizing Your Expenses
Knowing the difference between a want and a need is a good way to cut back on expenses. It helps you cut back on your wants.
A want is something that’s nice to have, whereas a need is something essential.
For example, shopping isn’t always a need. You might want a new pair of boots, but you don’t necessarily need them. Of course, clothing is a need, but it’s one you can meet more economically.
Needs include food, housing, clothing, electricity, transportation, and education.
And wants include electronic gadgets, dining out, video games, travel, sporting events, and concerts.
A need is something that is necessary, required, or essential. For example, a roof over your head, clothing, food, or medicine.
A want is something you’d like to have, but don’t necessarily need. For example, meals at restaurants, a trip, a gym membership, or brand-name shoes.
Needs and wants are not the same for everyone. What is a want for one person may be a need for another. For example, if you live near a bus route, a car may be a want rather than a need. If you don’t have access to public transportation and can’t get around any other way, you might need a car.
Also, your needs and wants may change over time. For example, a large house may be a need while you’re raising a family. But a condo or a smaller house may be sufficient once your children move out.
In the glossary, a need is defined as a feeling of lack that one seeks to satisfy through the consumption of a good or service. Satisfying a real need is necessary to participate in society (e.g., clothing, housing, education, etc.), whereas this is not the case for a created need (e.g., luxury clothing, the latest smartphone, eating out every day, etc.).
Calculate the balance: income minus expenses
Step 3: Subtract all your expenses from your monthly income. If you have a surplus, think about the best way to use it. Why not set up an emergency fund or make an extra payment to repay a loan faster?
If you often have small surpluses, add a “savings” category to your budget. Saving a little money each month is a good habit to get into.
If your expenses exceed your income, you have a deficit, and you’ll need to cut back on non-essential expenses. To do this, you need to distinguish between your wants and your needs.
Let’s recap the three steps of budgeting.
Step 1: Add up your monthly income.
Step 2: Add up your monthly expenses.
Step 3: Subtract your expenses from your income.
The goal is simple: don’t incur expenses that exceed your income.
If your expenses exceed your total income, be careful - there’s a problem.
Track Your Actual Spending Rather Than Relying on Memory
To calculate your expenses, you first need to have tracked them. But many people find it difficult to keep accurate track of their spending. The best way to do this is to record your expenses as soon as possible.
Record all your purchases and payments. Keep your receipts so you can verify your account statements at the end of the month and keep track of your cash expenditures.
Once you’ve identified your expenses, it will be easy to see where your money is going and to adjust your spending habits if necessary.
Even if your income exceeds your expenses, this exercise will be very helpful.
Tracking your money will help you determine what’s coming in and what’s going out of your pocket. Every dollar you spend has an impact on your overall budget.
For example, if you buy a $3 coffee every day, your expenses amount to over $1,000 a year.
To find out where your money is going, keep track of your expenses.
Try this exercise for 1 or 2 months:
- Write down everything you buy, from groceries to your daily coffee
- Record the bills you pay during this period, such as your phone or internet bill
- Try to divide your expenses into two categories: “needs” and “wants”
Small changes to your habits can have a major impact on your budget and your ability to save.
Once the groundwork is done, it’s time to get down to business!
Regularly track your expenses and income, and compare them to your projections. Did you budget too generously? That’s perfect - take the opportunity to set that money aside. Were you a little too optimistic? Take action to get back on track: postpone your night out at that trendy new restaurant until next month.
To choose how to track your cash flow in practice, several payment methods can help:
- a payment card with real-time authorization to avoid overdrafts
- a card with immediate debit to monitor expenses in real time
- cash to easily track your outflows
- automatic debit to ensure you don’t miss any bills.
Claire, who recently entered into a civil partnership, shares a practical approach to managing finances as a couple:
Sophie’s story, as a roommate, highlights another tracking tool:
Now that you have a budget, try to stick to it and improve it as you go.
To help you, try the following:
- Keep all your receipts and bills
- Limit your expenses as much as possible to what’s in your budget
- Update your budget with any changes, such as a wage increase or a lower bill
- Compare your budget to your actual spending at the end of each month
Review your budget from time to time. If your actual spending often differs from your budget, adjust your figures to make them more realistic.
When comparing your budget to your actual spending, ask yourself the following questions:
- Are there significant differences between your actual spending and your budget?
- In which categories are the discrepancies the largest?
- Are these discrepancies due to an unexpected event, or do they pose a risk of recurring every month?
- Are you saving enough money to reach your financial goals or repay your debts
What Your Balance Reveals - and What It Doesn’t
Knowing how to manage your money will protect you financially and help you achieve your goals. The first step toward sound financial management is realizing that you are in control of your finances.
A budget is a plan that helps you manage your money. It lets you know how much money you earn, spend, and save. Creating a budget can help you balance your income with your savings and expenses. It guides your spending habits to help you achieve your financial goals.
This calculation of your monthly balance shows whether you’re living within your means during the period in question, but it doesn’t, on its own, measure your overall financial situation - that is, what you own or owe in total. Before taking on additional debt, you should look beyond just this month’s cash flow:
Add up the monthly payments for all your credits, and make sure you have the financial capacity to repay an additional monthly payment.
Warning! Don’t take on too much credit; you risk ending up in a situation of over-indebtedness.
As a reminder, a monthly payment on a loan is the amount you must repay each month under a loan contract; it generally consists of a portion of the amount borrowed (principal) and interest. A debt is the obligation that one person (the debtor) is required to fulfill toward another person (the creditor); debt and claim effectively refer to the same obligation but differ depending on whether one is viewing it from the creditor’s or the debtor’s perspective.
SYSTEM CHECK
Map one full month of inflows and outflows before trying to optimize anything.
- CFPB - Your Money, Your Goals toolkit - United States - consumer financial education.
- CFPB - Creating a cash-flow budget - United States - practical cash-flow tool.
@proxxyy11 @lowdimotrucel @socio @Brava @DrMd i have to publish the others 41 now and editing their links
