Cash Management & Budgetting

Cash Management & Budgetting

Financial planning should always start with cash management or budgeting. Cash management addresses two major issues: finding the funds necessary to finance your plan, and ensuring that your cash is used properly to meet your goals. Think of cash management as a valuable opportunity to put your money to work for you.

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Because we have a limited amount of time and managing money is harder than making it, we need to budget; therefore, NBC gives you these valuable tips to help you manage your money better.

Are you accumulating wealth at a quick pace or are you struggling day to day to cope with your expenses? The best indicator is your net worth. 

There are three steps to create a budget: 

  • First, you have to identify how your money is currently being spent. This will require going through your checkbook, credit card statements over the last year or so and ATM withdrawal receipts.
  • Then, you have to evaluate this spending. Create some guidelines for future spending.
  • After this, you’ll have to track your ongoing spending to make sure it is within your plan. You may find that your guidelines were too strict or too loose and may need to be revised.

Here are two important steps to help reduce your spending:

  • Avoid impulse buying. Think before you reach for your wallet and your credit card. If you had to pay cash, would you still make this purchase?
  • Compare shops as a matter of habit. Differentiate between your needs and your wants.
  • Need: A necessity, something required, and essential for life: clothing, food, tools for work and medication.
  • Want: A desire, something wished for, something non-essential e.g. A vacation; meals in restaurants, video games, gym memberships and designer shoes.

 

My needs and wants - Setting priorities

Difference between needs and wants is the first step. The next step is setting priorities on your spending.

One helpful way to set spending priorities is the 1-2-3 system:

  • 1- Items that are essential for healthy living (e.g., basic food, shelter, clothing)
  • 2- Items that are not essential but are important (e.g., transit pass, running shoes, cell phone)
  • 3- Items that are not essential and not important (e.g., candy bars, spa treatments, music downloads)

 

It's easy to keep track of your daily expenses, once you get into the habit. Here's how:

  • Get a small notebook and write down each expense.
  • Record expenses on your smart phone or other electronic device.
  • If you bank online, you can get electronic account statements that show your spending history, and may even sort the spending into categories. You can get free online software that downloads data from your bank account. (Mint.com; personal capital; invest learn….)

 

There are also ways to get more out of the products and services you buy. Here are some tips:

  • Get a better communications package. You can often save by bundling your services for telephone, cell phone, internet and cable. Call your service provider to negotiate the best package. 
  • Make sure you have the best package of banking services, at the lowest cost. Contact your financial institution to see if you can get a lower-cost banking package or a lower profit rate credit card. Use compare4me.com to find lower-cost bank accounts and credit cards with the features you need.
  • Pay bills on time to avoid late fees, lower profit rate and penalties. Check your bills to spot mistakes and overcharges.
  • Check out the real costs of car ownership.
  • Compare the cost of renting vs. buying a home.
  • Consider forming a money support group with friends or family. In addition to getting discounts through group buying, you can help each other stay on track in reaching your financial goals.

 

There is no magic solution for everyone. Every person, every family, every household is different. If you want to reduce your spending, you’ll find ways to do it. And if you can’t, there are credit counseling services available you can turn to for help.

The envelope system

Another method for managing your cash flow and your spending is the envelope system. The advantage of the envelope system is that the money is allocated in advance, so there are pre-set limits to how much you can spend in any one category, each month.

How to set up an envelope system

  • Look at the total income you have available each month.
  • Withdraw your fixed monthly expenses: savings, debt payments, rent or mortgage, insurance, utilities, etc. Set this money aside before you allocate funds to the envelopes. 
  • With the remaining funds, estimate how much you will need for major expenses like food, transportation, household, clothing, etc. for the month. (It will be helpful if you have tracked your spending for the last few months.)
  • Label an envelope for each spending category. (An alternative is to use glass jars.)
  • Divide the monthly total for each category by four and place that amount in the envelope at the beginning of each week. 
  • Although the amounts in each category may be rough estimates at first, you can adjust them as you get more experience. You can also add envelopes for special projects and additional categories, as needed.

 

Keep your budgeting system alive 

Whether you use a budget or envelopes, your budgeting system isn't a one-time exercise. To make it work, you need to review it regularly. First step, do this weekly. Once you are certain that it is accurate, review it monthly. 

  • Verify to make sure that your income and expenses figures are still realistic. If your actual spending is far from what you estimated, you may need to adjust your figures.
  • Make sure you are keeping up with your savings and debt repayment commitments. Can you increase the amount you save or repay each month?
  • If you are sliding into a deficit, take a look at where you can cut your spending. 

 

Ways to avoid debt problems 

It's easy to spend without realizing how the debt increases. Here are few good tips for avoiding that trap:

  • Leave your credit cards at home.
  • Decrease the credit limit on your credit cards.
  • Set up automatic bill payments with your financial institution.
  • Avoid impulse buying. Sleep on it and see if you still want the item the next day.
  • Avoid "buy now, pay later" offers. 
  • Keep track of your expenses and manage them with a household budget.
  • Never purchase on impulse. Think over each expensive purchase for at least 24 hours. Acting on this principle, you will have more money for emergency savings.
  • Limit credit card purchases to those you can pay off in full at the end of the month. 
  • Did you know? If you spend18 dirham’s for a cup of coffee per day .This is 6500 AED, over a year. 
  • Go shopping with a list, and stick to it. Control your spending.