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Managing Money:
Making Your Money Work

Where Are You Now?

Now that you have thought about what is important to you and set some financial goals, the next step is make a plan as to how you are going to reach your goals. Do you know where your money goes? You probably would answer, "House payments, car loan, utility bills, and food." But after that, things begin to get a bit fuzzy about where the rest goes. Right?

After you have set your goals, as you did in Managing Money: Determining What is Important to You, the next step is to learn where your money is being spent. Then you can make a realistic financial plan. This might be a hard job for some people; others will find it very rewarding. No matter how you feel, it must be done before you can start to develop your own plan. This information is essential for high-quality, future financial decisions. Invest the time now for a better payoff later.

What Is Cash Flow?

Your cash flow is simply the money going into your pocket and out again. It is matching your income with your expenses. Sounds simple doesn't it? It really is. But very few people take the time to keep track of what actually comes in and goes out each month.

Next, use the Income and Expenses Work Sheet. For the most accurate look at your budget, an entire year's income and expenses should be kept. That's really a lot of work, but to help you learn what records you will need, this work sheet provides space for two months.

Income and Expenses

First, add up your total income, including any funds you receive in addition to your earnings. If you use take-home pay you will not need to include all the taxes and other deductions from your paycheck as expenses. Include child support or alimony that is received on a regular basis, any money from TANF (temporary assistance to needy families), Social Security, retirement pension, interest or dividends or any other sources of regular income. Do not include any irregular income, such as overtime or bonuses, when calculating your total income as you cannot depend on it being available for ongoing expenses.

Then, take time to collect all of your bills, receipts and check ledgers, which will help you monitor your spending for the month. It could be last month's, the current month, or both. Another way to monitor your spending is to use a daily expense tracker in which you record all the cash that you spend on a daily basis. Include both fixed and flexible expenses. Do you know the difference?

Fixed expenses — These are items, such as rent, mortgage, car payment and other regular installment payments, which basically stay the same each month and for which you are committed for a period of time.

Flexible expenses — These are the expenses that change from month to month, such as food, clothing and utilities. You have a bit more control over some of these items.

If you recently became self-supporting or are starting a household for the first time, it may be difficult to find complete records. Do the best you can for now and start keeping track of as many expenses as you can. Start writing down everything you spend for at least a week. The more accurate and complete the work sheet, the easier and more effective your financial planning will be.

The Bottom Line

If your income exceeds expenses, you will have money to put into a savings plan to use towards achieving your financial goals. However, if income does not cover all expenses, see what you might do to increase your income or decrease your expenses. Take a look at your budget to see if you can find some spending leaks. Look at the section on spending leaks for suggestions.

The most critical time to try to control fixed expenses is before you commit to an obligation. Are there other options you need to consider? Is there a way for you to reduce some of your flexible expenses?

How Much Do You Owe?

What Do You Owe?

It is necessary to list all of your credit obligations before you can analyze your total financial situation. Use the How Much Do You Owe Work Sheet to gain a clear idea of all of your credit obligations–both loans and credit card use. The next step is to determining your net worth.

Know Your Net Worth

You have already taken the first step in developing a money management plan by completing the first two work sheets. You also need to determine where you stand overall by preparing a net worth statement.

The net worth statement is the best indicator of your financial position at a particular point in time. It will help you determine the progress made toward your own financial goals.

Net worth is the amount you get when you subtract everything you owe from everything you own. This information also can be useful when you apply for a loan, write your will, borrow money, determine insurance needs or settle a divorce.

Net Worth

Use the Net Worth Work Sheet to figure your total financial worth at this moment. List all of your assets-the things you own. List the value of things like your house or furniture as the amount you could get if you wanted to turn that item into cash today. Next, list all of your liabilities-the amounts you still owe. This is the total amount you would need to repay if you hit the lottery and could repay the debts in full today.

What Are Your Assets?

Assets are any financial or material possessions that have monetary value. Remember these must be valued at the current market value. That is, what you could sell them for today, not what you paid for them, what you hope they are worth, or what you could get if you waited for the ideal time to sell. They include:

What Are Your Liabilities?

Liabilities are the financial obligations or debts you owe to other people or institutions. The information you gathered for the How Much Do You Owe Work Sheet can help you fill out this portion of the net worth form. List the amount you would need to repay the loan in full. Included are:

Total your assets and your liabilities. Subtract the liabilities from the assets. The result is your financial net worth. This number may not mean a lot to you as a single number, but if you do this once a year, it can help you track your progress. This doesn't mean it should go up every year, and it certainly is not an indication of your value as a person. But it can help you see what is happening to your overall financial picture. You should not compare your net worth to someone else's due to different values, goals and situations.

Now that you have taken the time to complete these work sheets, how do you feel about your financial situation? Happy? Relieved? Discouraged? If you are a bit discouraged, realize that a negative net worth statement may easily happen to someone just starting out on their own or to young families. Just as a photograph shows how you looked at one specific time, the net worth statement reflects your financial situation at only one point in time. It should be revised at least once a year or as your financial situation changes.

If you are not satisfied with your net worth and want it to grow, you will want to develop a plan to increase it. More income, decreased living expenses and/or more investment growth are some alternatives.

To increase your savings, you may have to cut spending in some areas. Make sure that your savings and investments are yielding the best financial return for your situation. You may want to reduce your present debt level by making regular payments and not adding any other debts.

If you are like most people, your overall goal will be to increase your net worth each year or at least until you retire or begin paying for something big like your children's college education. Developing a financial plan means taking control and disciplining yourself to manage your money to reach the goals you set for yourself and your family. For the best overall picture of your finances, realize that it is best to keep income and expense records for a whole year.

Next: Stop Spending Leaks


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