Creating a budget based on your average monthly expenses can get you into trouble if you don’t plan your cash flow correctly. For example, your average monthly expenses may be $3,500 throughout the year, but during some months, they might be much higher, based on a semi-annual insurance premium, quarterly tax payment and other expenses that come due. Creating a cash flow budget will help you budget and save for uneven, or variable, expenses.
List your income sources for the year. Include job earnings, interest, gifts, sales of personal items and other sources of cash you expect. List your expected income by month.
List your anticipated expenses for the year. Use last year’s financial documents, such as bills, invoices, bank and credit card statements and tax returns to guide you. Put expenses into fixed or variable categories. List your expenses in the months they will come due for payment, such as insurance premiums, tax payments, vacation spending and Christmas shopping. Estimate your total expenses for each month.
Subtract your expected expenses from your expected income each month and determine whether you will have any months where your expenses exceed your income. Budget savings from the months you expect more income than expenses to use during months when you will have a shortfall. Keep those savings in your bank account until you need them to make your extra payments.
Review your expenses to determine if you have any opportunities to reduce or shift your expenses. Look at variable expenses first, such as dining out, entertainment, clothing and hair and nails. Don’t skimp on groceries — a common mistake many budgeters often make, according to personal finance expert Dave Ramsey. Begin reducing expenses during months before you expect a deficit to begin building savings.
Contact creditors to determine if you can spread payments. For example, change from semi-annual to quarterly insurance premium payments to even out your cash flow. Look for credit cards, insurance premiums or other debt that comes with a payment grace period. If these come due during months when you will face a deficit, schedule your payments to take advantage of the grace period.
Contact your payroll department to suspend your 401k match contribution during months when you will need that cash to pay extra bills. Confirm stop and re-start dates for this. Determine if you will need to sell any securities to pay bills one month and how much lead time you will need to do this.
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