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Learn About Cash Flow to Help Manage Debt by Debt Plan Experts

Evaluating your Cash Flow Position

What is Cash Flow? This sounds really complicated, doesn’t it. Isn’t this something accountants do? How is this even relevant to my debt problem.

This section is all about shining a spotlight on your money in and money out situation. Also known in financial terms as income and expenditure. This is not as hard as it sound. Let’s see if we can make it easier to do.

As an example, here’s a story by a reader. Anna, in her late 20s, was planning her wedding well in advance of her special day. She started saving towards this important day as soon as she got engaged. She opened a special savings account so that she could keep track of her efforts.

With a wedding planner they worked out the budget and set aside a monthly amount to achieve it. When the day came closer it was soon easy to see that some big decisions had to be made. She was faced with what every bride has to cope with. Every item on her ‘to have’ list was going to cost more than she had calculated.

There was an extra small amount added to the catering budget as her family wanted to have more options. Then she realised that her flower budget was too low for what she had planned at the dinner. The photographer’s quote was now more and she had to make a decision to cancel the videographer. And the list went on.

Besides the cost now being more because of price hikes she also found that with a little extra money she could really make her wedding day special. In the end her wedding budget increased by a further 50%. She felt for the perfect day she just had to have all the extras.  After all she was only getting married once.

Of course when the special weekend arrived there were untold extra little items that had to be paid. The car to be used for the bridal party was no longer available so a taxi had to be hired. Some relatives were stuck at the airport having expected to be fetched and a taxi had to be sent. And the list went on.

The extra costs to her wedding were enormous. She and her new husband had huge borrowings and credit card debt to start their married life with. Added to this were her husband and her college debt, the cost of the cars they needed to get to work and the expense of establishing a good home together. It was not a good start looking to the future.

This is by no means an extraordinary story. Many people who find themselves in debt have very similar stories to tell. You will have a similar story to tell of how you got into debt. In all likelihood it would have been similar to Anna’s story in that you would think at the moment of spending more money than you have that it was unavoidable. You just had to.

Let’s have a look at Cash Flow calculations

There are many digital tools available to make this easier or more complex. Let’s start with the easiest way. Get a piece of paper, a pencil and eraser and let’s do this right away. Don’t waste time trying to find the perfect software or smartphone app. That’s just another way of sidestepping the issue.

Of course if you have time, do take a look around to see what’s available as a phone app or a cloud based solution you can run on your laptop or desktop. Even just setting up Google Docs and Sheets on a Google Drive can help. And the whole set up is free.

First Step in your Cash Flow Calculations

Reconcile your bank account. Phew. That sounds difficult. It isn’t. Take your piece of paper and fold it into three more or less equal columns. The first column use for writing down details. The second column use for what went out of your bank account and the third column note what went into your account. Start at least three months back from your current date. If you are doing this in January 2019 start with 1 October 2018.

Here’s a sample of a typed bank reconciliation. Easier to read than handwriting. But you don’t need a computer for yours. Get to work with pencil and paper.

October 2018    
Amount in acc at start of month   3680.00
01.10.2018 pd rent 1000.00  
Car instalment 400.00  
02.10.2018 pd Health Insurance 250.00  
15.10.2018 topped up pay-as-you-go 100.00  
22.10.2018 bought tickets to concert 80.00  
25.10.2018 pd clothes account at H&M 150.00  
pd clothes account at Zara 150.00  
pd gym fees 180.00  
Draw cash at the ATM 400.00  
pd Life Insurance Premium 150.00  
30.10.2018 Salary for Oct 2018 3500.00  
Amount left over for November 2018 4320.00  
  7180.00 7180.00
Amount in bank for November 2018   4320.00

Second step in Cash Flow calculations

Have a look at the items on your bank reconciliation and pick out all the items you have to pay every month, also called fixed expenses or fixed overheads. Go through each item to see what the full amount is that you are paying off and what you have to pay every month.

Of course one could consider the payments to the clothing store as monthly set expenses. But you could pay off your clothing accounts whereas your gym contract is probably a long term contract and you can’t really do without your health insurance. Your rent and car will also be amounts you have to pay every month.

Having said that although these amounts are items you have to pay every month you might be able to find solutions to reduce what you have to pay each time or get rid of them altogether.

Rent is always a bit item. Perhaps your rent amount can be reduced if you can move back in with family for a short while until you are out of debt. Maybe there’s a bus alternative to having a car or car sharing options. Have a good look at options you might have that will help you to reduce the fixed expenses. There will be some solutions in these articles as well.

Here’s a sample:

  Fixed expenses
01.10.2018 pd rent 1000.00
Car instalment 400.00
02.10.2018 pd Health Insurance 250.00
pd gym fees 180.00

Third step in Cash Flow calculations

This step involves the calculation of your variable expenses. These are expenses that can change depending on your requirements. For instance in the Sample above you see that concert tickets were bought. This is a variable expense because it doesn’t happen regularly.

All the cash you draw out of your account that you use for managing purchases such as buying groceries, or a lunch with work colleagues, a drink after work or buying a magazine. These expenses are different for everybody. And these expenses are really difficult to track. Do you ever keep the till slip for that soda you bought, or the water bottle you grabbed when you paid for petrol at the petrol station. Not many people do.

But these small purchases are like pouring your money down a well never to be seen again. You wonder where your 1000 dollars, euros, pounds or ZAR went at the end of the month. You have nothing to show for all that money. It’s just gone on a whole lot of random small purchases.

How do you keep track of those? With quite a bit of effort. But it can be done. Prepare to always carry a notebook with you and a pen and record every slip you get during the day. You will be shocked to see what you spend your money on.

Of course you will find it close to impossible to make a note of your variable expenses for the previous three months as you will have lost your slips. If you have a credit card and do not draw cash then you have a better chance.

Although you will have an amount come off your bank account for the credit card, you will be able to get a credit card statement that will show you all the individual purchases you made and in most cases you will be able to identify the retail outlet you bought from which will remind you what it was you bought.

Take your credit card statement and note each item in your Cash Flow book. How can you do this? Here’s one way of doing it. There’s an additional column you can add in your Cash Flow analysis that allows you to enter the items on your credit card statement. Of course it has to add up to the main amount. That means all the credit card purchases need to add up to the amount the credit card company took off your bank account.

Here’s a sample:

Pd Credit Card Statement   800.00
Credit Card purchase: groceries 180.00  
Credit Card purchase: Linen 220.00  
Credit Card purchase: Dinner out 120.00  
Credit Card purchase: Groceries 80.00  
Credit Card purchase: Petrol 200.00  

Calculate your Net Cash Flow

Over the months you work on this you will see how much money comes in and what you spend your money on. If you have a fair amount of money left over at the end of the month, that is you get more money in than you spend then you are in the lucky position of allocating that extra amount towards paying off your debts.

Besides your calculations over the months also check to see if you have any annual financial commitments that might not have come up during the months you have examined. This could be as easy as annual school fees or your car insurance that you might be paying once a year.

If however you have very little or even nothing left over at the end of the month, which is most often the case, then you have to make some big changes to your lifestyle in order to get out of debt.

At least now that you have a Cash Flow analysis you can see where exactly your money is going to and where you can cut down on your spending. Of course if your monthly income whether perhaps only in the form of a Government Grant, Government Benefit or as a low paid jobber is very small then your ability to reduce your expenses is probably non-existent. There are options for that situation and you will need to speak to an agency or counselling service for help.

A Negative Cash Flow is not Necessarily a Bad Thing

Do not lose courage if your cash flow statement shows that you are in financial bad shape. By working on fixing this by reducing your expenses and looking to increase your monthly income you can be at the start of a good thing.

The next few articles will provide guidance on how to get rid of your debt. As for how you can increase the money coming in this will be discussed in more detail in the final article in this series.

When you have adjusted your cash flow to accommodate your debt repayments you will in effect create a positive situation. You have more money at the end of the month to distribute. Once you have paid your debts you will be able to start saving this extra money. One of the essential building blocks to creating wealth is having money left over at the end of the month.

A further huge benefit to having a cash flow analysis is that once you know what income you have and where your money is flowing to is that you are in control. By knowing exactly what is going on gives you the power to determine your own financial health.

Now you know where you need to save money, you will be able to plan how to go about reducing these cost and you will know what important items need to be paid and what amounts you can allocate towards debt reduction. Having control will give you confidence and courage to tackle the tough decisions you have to make.

A final word for this second step on How to Get Out of Debt

This series of articles will not be the final word ever written on How to get out of Deb. We would love to hear from you. Send us your stories on how you are struggling with debt. We would also love to hear how you are coping and whether you are managing to shake it off.

Add your thoughts or share them with us on this blog or on our Facebook page. Help us grow this series so that not only do you benefit but your contribution will assist others in your position.

Here is the list of articles that will be compiled into an eBook once all have been published. Download this article if you can’t wait. It’s free and you don’t even need to leave your email address. If you do part with your email address you will know when the next articles are published. Might be worth it then.

Here are all the articles in this series.

Intro: 7 Pro Steps To Get out of Debt By the Experts at Debt Plan
How to get out of debt by changing your Mindset
Learn about cash flow to help with managing debt
Pros and cons of a loan consolidation
Debt consolidation as an option for debt relief
Full implications of a debt consolidation loan
Getting into good money habits with a savings plan
Keep the debt collector away – earn more

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