Don’t blame gremlins for gobbling up your cash. Chances are any missing cash is simply from your own doing. Push aside any fears you may have about creating and maintaining a financial budget and find out, once and for all, where all your money is going.
The first step in setting up a budget is to determine your cash flow. It will present a summary of your income and expenses during a certain period of time, such as one month. In creating a budget, expenses are subtracted from income, and the difference is the total of your surplus cash flow, if any. With the surplus you may choose to spend it, use it to trim down debt, or boost savings for retirement, college education, charitable contributions and more. With no surplus cash flow, it’s time to adjust your spending habits and perhaps take a look at increasing your income.
Once you’ve established your cash flow statement, assess your current situation by using these general guidelines to provide additional perspectives.
Emergency funds. In case your income ceases or declines for some unfortunate reason, create an emergency fund to cover three to six months of nondiscretionary expenses.
Saving rates. A common target amount to determine a long-term savings rate is approximately 10 percent of gross income. Everyone’s situation is unique. But remember that if your time horizon to certain goals is close, it may be necessary to save at a higher rate of 15 to 20 percent.
Housing costs. Review your monthly housing costs (principal and interest payments, real estate taxes and homeowner’s insurance), which should not exceed 28 percent of your gross monthly income. However, depending on your net worth, you may qualify for more or less financing.
Total debt coverage. Add up your housing costs and personal debt (car loan payments, college loans, etc.) and try not to exceed more than 36 percent of your gross monthly income.
Budgeting shouldn’t be scary. By taking the steps to ensure for a more sound financial future, you could be eliminating many fears you’ve had in the past. Additionally, the benefits of doing your budget today will also help in curtailing overspending during the upcoming holiday season. Happy Halloween!
For help with the cash flow process, you can access free tools online, like this cash flow statements document.
Rob Rumley may only transact business in states where he is registered or excluded or exempted from registration. Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where they are not registered or excluded or exempt from registration.
Rob Rumley is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Atlanta, Ga. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Morgan Stanley Wealth Management LLC. Member SIPC.
