One of the most valuable business and personal finance lesson I learned is, “You cannot manage anything you cannot measure”. This is so true, even on a personal basis. Time and again, we wonder at the end of the month how our money just flowed through our hands. We scratch our heads, wondering why our bank accounts are in red ink all the time.
Does money just magically disappear or is it our lack of willingness to put controls into our cash management that prevent us from getting into financial holes?
What is personal cash management? To sum it up, it simply is 1. Planning what you will spend on in the coming month 2. Recording how you spend 3. Analyzing the results.
Planning for success
Conventional management techniques means sitting down and setting a year long expense budget. While this does have its merits, for the individual who is sinking his teeth into cash management for the first time, this is not the best way to go. I always suggest to our clients to list down and plan expense for the coming month, on the last week of the prior month. The objective of this exercise is to plan to spend only 70% of your current income. Those who live from paycheck to paycheck may find this impossible at first. Don’t worry, changing your money situation is not a one month process. You can aim for spending 95% initially but eventually should work at bringing it down further to your target 70% or even less than that.
Another benefit to you is awareness. Your sitting down with pen and paper makes you realize where the money is about to go and this process allows you to make changes in areas where there is excessive spending.
The second step is to buy a small pocket size notebook. I have preference for those with wire ring binders. I scrounge around the house for used pencils which are three inches in length which I can conveniently push into the coiled ring binder of the notebook. While ballpoint pens can also be cut down to size, I do not recommend it.
After soiling my shirt and pants with leaking ink, I finally learned that the best writing instrument for this exercise is a pencil. From day 1, you begin by simply writing any expense, no matter how trivial in this notebook. If you miss a day, you have to quickly make up for it by taking the time to recall the expenses you missed. The proximity to the missed day is important, for if you take too long in writing these missed items down, the greater the tendency for it to be forgotten.
At the end of every day, simply total all the amounts and put the result at the end of the day.
No one can make you change your habits. Only you can do that. We now come to the most important part of the exercise. This is where analysis of the results and a clear understanding of what needs to be done happens.
The first thing you are looking for is the average amount of money you spend everyday. This is important for it tells you how much of the precious cash is flowing out of your pocket.
Take the average and multiply it by 30. Hopefully, the total average amount is less than your average daily income. Doing it on daily averages puts the expense and income right in your face. If you average P1,000 per day of wage, and you discover you are spending in the vicinity of P1,500, you immediately know that you are in serious trouble. If you are not there yet, I am sure, you will get to the red numbers pretty quick. You can walk around with this average daily income and expense in your head all the time. Now you have what we call a “benchmark” or a “spending standard” which hopefully will help you slow down on the wallet-flip and pay syndrome.
Another pattern you may want to look for is where you spend your money. Create five expense categories. The basic food, shelter, clothing, education, transportation categories can be a starting point. Don’t go beyond five for we want to keep things as simple as possible for now.
Get a clean sheet of paper, draw four vertical lines and put the categories as the column headings. As you go through your notebook, just write down the amount you spent in the category you want them to fall in.
Total the columns to get the total amount of expense for the month. Now you know, where the money is flowing. The appropriateness of the amounts is up to you. Just keep in mind that this exercise has a very important objective of bringing down the expense level to 70% of what you earn.
If you continue doing this exercise for 12 months, you are on your way to financial heaven. From this notebook, you should graduate to more complex and accurate systems. For the newbies, this should be sufficient help for now.
The “Walking Eater”
Moneydoctors recently developed a personal finance notebook called “The Walking Eater” It sells for less than P100 and you can order it by simply sending us an email request. We are making arrangements for a PayPal facility for you to make ordering easy and painless. We normally send it to you via snail mail to keep the cost down. The notebook was developed as a result of an actual “walking eater” who spends too much money on street food and found financial redemption in his small pocket notebook he carries around. It is our hope, that you too will take the path of discovery so that you may live a more peaceful financial life and thus become another “Walking Eater” success story. Joe Ferreria