In the next two blog posts, I want to go back to the basics of financial planning because even the most seasoned pros need a refresher every now and then. Let’s start with mastering cash flow. Despite being a generation that goes out more often and makes more purchases, Millennials are still spending less on average then Baby Boomers or Gen X. Good job, Millennials! We are spending more on retail and dining, but we like a good value and are cost-conscious. The internet has allowed us to comparison shop and hunt for deals on the things we want. We also saw what happened in the Great Recession. It was scary to watch older generations face the problems of sudden unemployment and economic downturn. This has given our generation a different view of our personal finances. However, we still don’t have as much discretionary income to spend. The older generations can afford the high-priced purchases because they have advanced more in their careers, but we will get there. The first step is to become a master of cash flow.
Laying the Groundwork
Mastering cash flow is essential because it is the foundation for your financial planning. If you feel disconnected from your cash flow, don’t worry. You are not alone. Most Millennials feel the same way! It takes a lot of hard work to master cash flow, but here are a few pointers:
- Start by tracking your spending for 3-6 months. Figure out what you are spending money on. You can use an app or website or Excel. Any method works as long as you keep track of it.
- Is your income covering all your expenses? Or are you racking up credit card debt or borrowing from retirement savings (if there is any)? This will let you know if you have enough income to pay for all your expenses or if you need to dig into cash flow and look for sources of savings.
- Create a budget based off what you have tracked for the past few months. Try to stay within that budget. Having a cash flow plan can allow for discretionary spending while helping you mange expenses and potentially find savings for your goals.
- If you are struggling to stick within your budget, consider using different accounts for different expenses. Meaning rent or mortgage payments, utilities, etc. all come from one bucket and things like clothing or dining out come from a different one. This may help you see what you do or don’t have available to spend on the discretionary things.
It takes time to master cash flow. And if you are an entrepreneurial Millennial and have unpredictable income, this will take even more work. Don’t expect to hit a rhythm with your budget the first or second month. Have discipline because mastering cash flow is worth it. Once you have it mastered, you don’t have to worry about frivolous purchases as long as it stays within your budget. And in the larger picture of financial planning, it is impossible to know how much money you will need to save for your financial goals (home, student debt, retirement, etc.) without knowing what you spend now. Put the time in to become a master of cash flow!