What is a cash flow?
Most of us rely on a form of income each month, and we’ll also have multiple expenses – which could range from groceries, to school fees, to petrol or other utilities.
A ‘cash flow’ is a term that describes the movement of money. While this can refer to one particular expense item or payment, the term is often used to describe the movement of both income and expenses through a banking account.
If we end a particular month with fewer expenses as compared to our income, we term this cash flow as in ‘surplus’ or a ‘profit’. Otherwise, if our expenses are larger than our income, we term this a ‘deficit’. Where we see income and expenses are equal, we term this cash flow as ‘balanced’.
The way we manage our income and expenses – and make sure that we have enough money to make regular repayments on debts, purchase new items, save, or make an investment, is called ‘budgeting’.
What is budgeting?
Put simply, a budget is an idea or plan of what our cash flow will look like each month. In a budget, we essentially create a financial game plan to ensure that we always have enough money to manage our day-to-day expenses.
Budgets are often used in businesses or in government, but they’re used by people, too. The main goal of creating a budget is to ensure that we manage our day-to-day lives and ensure that we don’t create or attract more expenses than our income allows us to.
Budgets are used to help people develop a better idea of their financial situation, and can also help you develop a better understanding of what kind of expenses you are paying. Using a budget can help you review your expenses and determine if you really value the items or services you are paying for, and can help you save money and create investments that you can use either for emergencies or even into your retirement.
It can be useful to think of a budget as a financial game plan – where you’ll be able to continually review your performance and set new goals throughout each month. A budget will give you the power to not only review your spending habits, but also plan and prioritize different expenses as your life changes.
How can I start a budgeting plan?
Starting a budget doesn’t need to be as complicated or as scary as it sounds. A good budget is simply a list of your monthly income and expenses, where you’ll be able to see whether you’ll be in deficit or profit at the end of each month.
A great budget, however, can empower you to make wise financial decisions – where you can adjust and fit your finances to fit your lifestyle, and ensure that you always have enough money to get by and manage an emergency when one -arises.
How to budget successfully
If you’re ready to start creating a budget plan, the first thing you need to do is tally your total income that you expect to receive each month. Secondly, you’ll need to write down all your major expenses and see where you spend the most money each month.
Once you’ve done that, you’ll be ready to review your expenses – where you’ll be able to look closely and determine if you really value and use what you are paying for.
How can I review my expenses?
Reviewing your expenses is the process where you’ll take a deeper look at your expenditure (that is, what you pay towards goods or services each month) and determine if you need to continue paying for them, or if you can do without them.
For many people, this can be a confusing process as it can be difficult to separate what we really need from what we want, and having to choose between different expenses per month can be a difficult decision if you are finding that you aren’t saving enough money by the end of the month.
When reviewing your expenses, the most important thing you need to do is determine what your wants and needs are. This is unique to every person, and there are few ‘right’ or ‘wrong’ answers. Instead, what you’ll have to do is review what items do and don’t add the most value for you.
Often, common payments we need to consider as ‘needs’ are:
- Utilities (such as electricity and water)
- Groceries (food)
- School or education fees
- Petrol or transport
- Taxes or levies
- Debt repayments
Some common payments that could be considered ‘wants’ are:
- Beauty products
- Designer clothes
- Premium electronics
- Fast foods
A good rule of thumb to separate a ‘need’ from a ‘want’ is to ask yourself whether a purchase or service is necessary, or is there to make you feel comfortable. If you find that a regular payment or item you purchase doesn’t add great value to your daily life, it might be worth putting that money to better use – such as in a savings account, an investment, or towards another necessary item.
When reviewing your expenses, you’ll want to find ways to ensure that not only do you regularly examine the items you purchase or the services you pay for, but further that you can save more and more money each month to build an emergency fund or an investment for the future.
While this might sound challenging, there are a number of simple ways that you can get started right now. Why not take a look at our 40 massive money saving tips, where we offer some great suggestions all the way from cutting your electricity costs to simple health hacks that can both save you money, and leave you feeling more comfortable.
Where can I find a monthly budget template?
One of the most important tools you can use to create a working budget is a monthly budget template – where you can list your monthly income and expenses and work to see where you might be able to spend either more or less.
If you’re ready to get started, we have a great free budget template that can help you begin your journey into budgeting that’s available in both PDF and Microsoft Excel format.
What are some easy budgeting tips that can help?
Budgeting is a process that you’ll need to practice each month to ensure that your financial game plan works for you – and you might find over time that you learn new things about your own spending habits!
Why not check out our guide on how to create a budget and stick to it? You’ll learn not only how to calculate your expenses, but also you can create goals as well as record your spending habits.
Lastly, if you’re ready to continue your journey to financial mastery, why not visit the Wonga Money Academy – where you can learn more about the four pillars of financial literacy, such as budgeting, debt, saving, and investing?