One of my long-term professional goals is to come up with a process for helping households evaluate their cash-flow and provide clarification on the age-old question: Where does my money go each month?

In doing some preliminary reading I came across THIS ARTICLE from the December 2008 “Journal of Financial Planning“.  In it the author takes a unique perspective in measuring cash-flow.  Most models I see use a fairly simple approach where a person categorizes their spending into different accounts such as “housing”, “groceries”, “entertainment”, etc.  With this approach the author views spending in…..

1. The static account is their 30-day
money. This is what it takes to run
their household for a month—the
mortgage, utilities, car payments,
insurance.

2. The control account is their seven-day
money. These are the funds that they
will spend today or within the next
week. These are lifestyle types of
expenses—dining, recreation, hobbies,
groceries, and gas for the car.

3. The dynamic account funds all future
expenses, from trips and gifts, to cars,
education, and retirement.

This perspective is fairly simple and allows the household to see what areas they have control over.  I look forward to giving this approach a whirl soon.

Despite its critical importance to the financial planning process very few households operate on a budget and/ or track their spending.  I can appreciate why.  The process is tedious and overwhelming.  I wanted to share THIS SPREADSHEET that I found on google docs for those people who want to take a pro-active step in evaluating their cash-flow.  I would recommend sitting down with your bank and credit card statements at least monthly to record your spending so that you can see for yourself how you’re doing.

What I like about this spreadsheet is that the spending categories are plentiful and customizable so you feel like you are getting an accurate depiction of your spending history.  If you have any other ideas for tracking cash-flow please leave them in the comments section below.

*Only 16% of workers surveyed stated that they were very confident about having enough money for a comfortable retirement.

*Only 19% of retirees said they were very confident about having a financially secure retirement.

*More than half (54%) of workers surveyed reported that the total value of their household savings and investments was less than $25,000.

*Less than half (46%) of workers reported that they have tried to calculate how much money they would need to accumulate in order to insure a comfortable retirement.

If you are like a majority of workers and haven’t taken the time to calculate your capital accumulation needs then you can contact a financial planner (I’d be happy to help) or check out this blog post which has many retirement calculators.

I am currently in the middle of our retirement planning module learning about qualified benefit plans, IRA’s, 401(k)s, etc..  One of the big questions in the retirement planning community this year is whether or not it makes sense for a traditional IRA owner to convert their account to a Roth IRA.

In the past this option was only available to households with adjusted gross income’s <$100,000.  However, this year it’s available to anyone.

The NY times published a good summary of the decision making process here.  By coincidence, my investments module professor is quoted near the end of the story.

If you are thinking about converting I would encourage you to read the article.

An interesting note is that Lauren in her research found that during the origins of the United States frugality was a virtue that was encouraged because it helped the US Economy distance itself from relying on Britain. After World War II however consumerism was encouraged because it helped utilize the excess capacity in our economy used to service the war effort. Furthermore, it was around this time that consumer credit was created and became mainstream. Ever since we’ve been playing catch up.

You can click this link to buy the book from Powell’s.

Wife: I just can’t get these numbers to add up.
Husband: Like we’re never going to get out of this hole.
Wife: Credit card debt, does it ever end?
Salesman: [entering from who-knows-where] Maybe I can help.
Husband: We sure could use it.
Wife: We’ve tried debt consolidation companies.
Husband: We’ve even taken out loans to help make payments.
Salesman: Well, you’re not the only one. Did you know that millions of Americans live with debt they can not control? That’s why I developed this unique new program for managing your debt. [Holds up book] It’s called, “Don’t Buy Stuff You Cannot Afford”
Wife: Let me see that. [Reading from book] If you don’t have any money, you should not buy anything. Hmmm…sounds interesting.
Husband: Sounds confusing.
Wife: I don’t know honey, this makes a lot of sense. There’s a whole section here on how to buy expensive things using money you’ve “saved”.
Husband: Give me that. And where do you get this “saved” money?

For the past few years US households “leveraged” themselves by borrowing money on easy credit qualification.  Not only did US households engage in this process but US corporations did as well.  In fact, leverage is the reason Wall Street behemoths Lehman Brothers, Bear Sterns, and Merrill Lynch all collapsed.  They had borrowed money to buy assets that are now difficult to value which caused their capitalization ratio to fall below allowable levels.

Many US households face similar fates.  Borrowing money to purchase investment properties, consumer goods, or other non-liquid assets is now causing problems throughout our economy.

This artcile which was publised on www.cnnmoney.com is another sign that the downturn in the economy is forcing consumers to spend less, save more, and pay down debt.  Although this spells problems for US retailers it is great news for the long-term viability of our economy.

At the root of success or failure regarding a household’s finances is how well they control their spending.

A household that spends LESS THAN they bring in will be flush with cash that they can save, invest, and allow to grow.  They also will not fall into the debt trap which prevents people from accumulating wealth.

A household that spends MORE THAN they bring in in trouble.

The problem is that most households don’t take the time to track how much is going in and how much is going out.  I began this process three months ago using an online system called mint.com.  The exercise has definitely been an eye opener.

Jeff Opdyke wrote this article appearing today in the WSJ which talks about tracking and living under a “spending plan”.

A couple great points from the article:

*You can choose to eat out every day, or you can choose to replace your wardrobe, or you can choose to pay off additional principal on your debt balances, or you can choose to afford a getaway over a long weekend. Whatever you want to do with your money, you can do it.  But here’s the catch: You can’t do everything. (my underline)

*The goal of successful budgeting is learning to live within the bounds of your discretionary income. (He defines discretionary income as your income less all fixed monthly expenses such as mortgage/ rent/ other loan payments, utilities, etc.)

*The first item on your discretionary spending list every month should be an amount allocated to your savings account. A savings account is your first line of defense in a financial emergency, so fund the reserve every month to build an increasingly larger cushion with each passing month.

Contact me today if you’d like to set up a spending plan!  We do offer services that help households accomplish this task.