Budgeting and cash flow are topics often broached in the business arena. But these concepts are also useful when it comes to managing your personal finances. But why are they regarded as two separate things? How do they differ from one another? Let’s take a look at Cash Flow first.
Cash flow means precisely what it says – the flow of your cash. Just like the moon and the tides it waxes and wanes – changes from high tide to low tide dependent on at which point in time you look at it.
High tide is when you have plenty of money- usually, once your wages have been paid. Then there are all of the outgoing cash transactions, each of which decreases the amount of money you have left, as high tide becomes low tide.
A cash flow record is an early warning system
Compile your cash flow record in strict chronological sequence. By doing this and including all money transactions both in and out and extending the record forward by forecasting what will happen in the future, you will get a reasonably accurate picture of your personal cash flow. You can then use it to spot any problems that might be looming up in the future.
A budget is similar to cash flow in one way. It too should include all of your outgoing cash commitments. It doesn’t necessarily have to show your earning income, but it must show all of your forecast outgoings.
The importance of capturing all of your planned expenditure
The job of a personal budget is to capture and add up all of your expenditure. It is, of course, essential to include everything you expect to have to shell out for.
It should include your grocery shopping, cost of fuel for your car if you have one, and all bills such as electricity, gas, water, and rent, etc. If you have any loan repayments including any mortgage, these too must be included. In other words – your total cost of living.
Some people also include a contingency for unexpected costs. Things like car repairs or having to buy a new pair of shoes for example.
Once you’ve compiled your finite list, you will hopefully have captured all of your outgoings. It doesn’t really matter too much about keeping everything in chronological order because that is the job of a cash flow record.
Completing your personal budget plan
Your budget is not yet complete, however. Yes, you’ve hopefully logged all your predicted outgoings going forward. But the reason for creating a budget in the first place is to help you to manage your money; not just see how much you are spending.
The next stage is to establish what you are spending that money on with a view to controlling your money supply.
Once you’ve stripped out any non-essential expenditure, then you have your budget. You now need to compare it to your earnings to ensure you are not spending more many that you have coming in. You may want to go one step further and trim your budget a little more to allow you to set some money aside as savings regularly.
Budget plans and cash flow logs are complimentary.
The big difference between a budget plan and a cash flow record should now be obvious. A budget is a spending plan. A cash flow log is a record of actual and forecast expenditure.
However, in managing your money supply, both are complementary to each other. Click here If you would like some additional tips and guidance from Wonga on how to get started with using these tools.
Remember that your budget is all about ensuring you are living within your means. Your cash flow is a check that you are indeed doing so and more importantly, that you will continue to do so as long as you stick within your budget.
A cash flow log is an ongoing project. But so too should your budget be. Things change, and your budget needs to reflect any changes. Only when it does so will you stand a chance of controlling your money supply properly.
If you would like further help, why not take a look at the four best South African apps that are being used by many people to help them to get to grips with managing their money?
To read more on topics like this, check out the budget category