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4 March 2013

The Importance of Cash Flow

Filed under: Manage your Money - Tags: - @ 8:45 pm

The Importance of Cash Flow

Whether you are running a business or managing the household finances, cash flow is critical. The difference between cash coming in and cash going out in any given period of time is the net cash flow. If it is positive, your cash balances will increase and if it is negative, your cash balances will decrease.

The easiest way to grasp the concept of cash flow is to think of a water tank. Imagine a pipe at the top of the tank pipe bringing water in from an external water supply. At the bottom of the tank, imagine a pipe taking out water to be used for a multitude of purposes. The water in the tank will rise and fall depending on whether more water is coming in than going out.

Cash flow is easy to manage when the flows are constant. It is not so easy where there is large variation in cash flows, for example in small or expanding businesses, in households where income comes from self employment or from commission, and in property investment. Without careful management the tank can run dry, with disastrous consequences.

The principal tool for managing cash flow is planning. With a cash flow forecast, that is a month by month analysis of estimated money coming in and estimated money going out, you can estimate the net cash flow and the impact this has on cash balances. You can then put strategies in place to cover the periods when there is likely to be a large negative cash flow – for example, altering the timing of payments, borrowing funds, finding additional sources of income or cutting down on expenses. Many businesses, property investors and households have come to grief when the tank runs dry and there is no contingency in place. Don’t be one of them!

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10 December 2012

Talking About Money

Filed under: Manage your Money - Tags: - @ 3:24 am

Talking About Money

Good communication is important in any relationship and one of the most vital subjects to discuss is money. It is surprising how many couples get together without having a frank and open discussion on how money will be managed in the relationship, only to find that fundamental differences in this area become a significant cause of friction. It is not uncommon for different attitudes towards money to lead to a complete breakdown in a relationship. To avoid potential conflict, here’s how to get talking about money:

  • Before you talk to your partner, you should each have a clear understanding of what money means to you and the purpose of money in your life so you can share these thoughts with each other
  • Set a time, not just for one meeting, but for a series of regular (eg monthly) meetings to discuss your financial situation. Meet at a time when feelings are neutral rather than angry or stressed, when it is quiet and you have the energy to focus on the discussion.
  • In your discussion, be willing to see things from your partner’s point of view and show a willingness to compromise so that each of you can have your needs met.
  • Don’t be critical or judgemental of your partner’s views. There is no right and wrong when it comes to managing money. The most important thing is to make decisions based on a full understanding of the consequences of those decisions.
  • Set shared goals and priorities for your money and hold each other accountable to achieving them.
  • Make it a team effort to manage your money rather than relying on one person to manage everything.

If you have conflict over money, your relationship will struggle to survive. Use good communication to maintain harmony.

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8 October 2012

How to Recession-Proof Your Finances

Filed under: Manage your Money - Tags: - @ 2:58 am

How to Recession-Proof Your Finances

 There is a direct link between how confident people feel about their financial situation and how much they spend. This was evident in the property boom that occurred prior to the Global Financial Crisis. When property prices were rising, home owners felt wealthier and had the ability to borrow more. Funds borrowed were spent on more property, (investments, home improvements or bigger homes) or non-essential goods and services. Debt levels increased sharply.  When property prices fell, confidence levels dropped and banks became nervous about lending. Low interest rates have been the saving grace for those burdened with debt.

Since the Global Financial Crisis, low economic growth has led to increased unemployment which in turn has increased the level of caution. Lower confidence usually means less spending, lower retail sales, less money circulating through the economy and continuing low economic growth. A recent survey by Dun and Bradstreet foreshadows low levels of retail spending this Christmas, with more than two thirds of those surveyed saying they plan to spend less money on non-essentials than they did last Christmas. The survey also shows that one in four people would be unable to survive for longer than a month on their savings if they lost their job tomorrow and only four percent could last for seven to twelve months. Those who either experienced or observed the Christchurch earthquakes have learned the importance of having financial reserves to draw on in times of crisis.

The higher your financial reserves, the more resilient you will be to changes in the economy and unexpected events. Instead of lurching from spending spree to cutback, keep your spending on an even keel. When times are good, build your reserves instead of increasing your spending. That way, your confidence will increase and you will be less affected by economic downturns.

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18 June 2012

Is Your Boss Short Changing You?

Filed under: Manage your Money - Tags: , , - @ 2:37 am

Is Your Boss Short Changing You?

Financial literacy is still a major issue in this country, particularly with regard to retirement savings. A recent online survey by ASB showed a huge gap for most people between the retirement income they want and what they will actually achieve at their current rate of saving. It seems most people have little understanding of how much money they need to save for retirement. Employers are in a good position to help educate their employees about retirement saving and ensure they are receiving the best possible advice on KiwiSaver contributions. Under current legislation, personalised advice on retirement savings should be given by an authorised financial adviser, however employers can provide employees with generic information on retirement savings and make arrangements for employees to receive personalised advice from an adviser at either the employer’s or employee’s cost. The financial literacy problem is not just about saving for retirement, however, it is also about how to save for more immediate goals such as buying a house, paying off a mortgage or taking an overseas trip. Most employees would benefit from education in simple budgeting techniques.

There are good reasons why employers should have a role in improving the financial literacy of their employees. It could be argued that employers have a moral obligation to ensure their employees are able to make informed decisions about whether they join KiwiSaver, the level of their contributions and their choice of fund. Otherwise, employees may be short-changed by missing out on employer contributions and Government tax credits. An equally compelling argument is that people who feel they are in control of their money are happier than those who feel as though they are living from payday to payday and not achieving their goals. Happy, contented people are easier to manage and more productive in the workplace.

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5 December 2011

The True Cost of Lunch

Filed under: Manage your Money - Tags: , - @ 1:28 am

The True Cost of Lunch

People who complain about not having enough money to enjoy life are often guilty of spending their money on things that aren’t important to them but which make them feel good for a few brief moments. The classic example of this is money spent on takeaway food and drink, especially lunches and coffee breaks at work.

If you spend $10 a day on lunch, that’s $50 a week. If you ‘brown bag’ your lunch and instead invest $50 a week for a return of 3% per annum compounded, here’s what you can do:

  • After one year, you will have around $2,638; enough for a holiday in Australia
  • After five years, you will have around $14,021; enough for a trip to Europe
  • After ten years, you will have around $30,310, which would go a long way towards a deposit on a house or your children’s education costs
  • After twenty years, you will have around $71,222; enough to buy a brand new luxury car
  • After thirty years, you will have around $126,443, which might allow you to retire much earlier than age 65
  • After forty five years, you will have around $247,513 which, combined with your KiwiSaver funds, could allow you to live a very comfortable life in retirement.

I am reliably informed by several ‘brown baggers’ that the best way to take care of work lunches is to cook extra for your evening meal and serve it into a container that you can freeze or refrigerate for the next day or later. If you don’t have a microwave at work, stock up on easy to prepare cold food that won’t go soggy if prepared the night before. Do a quick internet search for ideas for lunches that taste good and help you save to enjoy life.

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8 August 2011

Don’t Eat Your Money

Filed under: Manage your Money - Tags: , - @ 9:03 am

Don’t Eat Your Money

The biggest expense for a young family is the cost of housing. Rent and mortgage payments are fixed costs which can only be reduced by moving to a cheaper house, so when it comes to saving money we need to look at the next biggest expense, and that is the weekly shopping bill. There is a wide range of food spending patterns depending on household income, the number and ages of family members, people’s eating habits and expectations about the standard of food they like to eat. Whereas some people expect to dine on roast lamb and salmon, others are quite happy living on mince and sausages. Because there is so much variation, food is a prime area for finding ways to cut back and save. One of the easiest ways to do this is to shop as infrequently as possible with, say, a big fortnightly shop of non-perishables supplemented by more frequent purchases of fresh food. It is important to buy the right kinds of food as well as spending the right amount. Every year, the University of Otago publishes a Food Cost Survey which is available by clicking here. This survey calculates the weekly cost of purchasing a healthy diet for men, women, adolescents and children in major cities and looks at basic, moderate and liberal budgets. It’s no surprise that food costs for a teenage boy are around $107 per week compared to $85 for a grown man! A moderate budget for a couple and two children under the age of five living in Auckland is around $255 per week. For a couple with two teenagers the cost is around $359 per week. Use this guide to set a strict budget for your food, so you don’t eat your money!

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1 August 2011

Secret Spenders

Filed under: Manage your Money - Tags: , , - @ 3:07 am

Secret Spenders

One of the advantages of being a single person is you can spend your own money on what you want, when you want. Of course, the downside is there isn’t another person to share the cost, so freedom comes at a price. Getting together with another person usually means setting agreed financial goals and this can lead to feelings of guilt when you spend money on anything other than what has been agreed. Just as there are people who eat chocolate bars when no one is watching, there are those who secretly spend. It’s what is referred to as ‘financial infidelity’. Secret spending can range from sneaking shopping bags into the house when no-one is looking to secretly clocking up debts on credit cards or gambling.

A recent survey of couples in Colorado, USA, found that thirty one percent of people surveyed who shared finances with a partner had been deceptive about money and more than half had hidden either cash or purchases from their partner at some point. Even worse, around 34% said they had lied about debt or income to their partner. In the same survey, 16% said their financial infidelity had resulted in divorce.

When two people come together, they should be willing to talk openly about their financial situation; that is, their income, assets and any debts they have. If a prospective partner is reluctant to share financial information, there is a reasonable chance that person will be a secret spender during the relationship.

It is important that each partner in a relationship has access to money that is theirs to spend on whatever they want. By having separate accounts for ‘pocket money’ into which an agreed amount is deposited every payday, partners can have a degree of financial freedom without resorting to spending in secret.

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28 March 2011

Dealing with a Shopaholic

Filed under: Manage your Money - Tags: , - @ 5:30 am

Are you a Shopaholic?

Severe overspending is a problem for around 10% of the population. Like any other addiction, it is usually triggered by an emotional or behavioural issue and followed by feelings of remorse and guilt. The overspender may then make promises and attempts to change but after that the cycle starts all over again. Often the biggest hurdle to changing this behaviour is for the overspender to acknowledge they have a problem. Denial is an easy way to avoid having to confront the issue. The signs of chronic overspending are:

  • Spending over your budget even when you are already in debt or unable to pay your bills
  • Overspending on a regular basis (every week, not just a couple of times a year)
  • Compulsive spending; that is, buying things you don’t really need
  • Spending to make yourself feel better when you are under stress or feeling low
  • Hiding purchases out of shame or to avoid an argument with a family member
  • Physical or emotional reactions to spending such as an increased heart rate, sweating and headaches from anxiety; emotional effects such as elation, followed by guilt or depression
  • Frequent arguments with family members and friends about your spending

 Dealing with an overspender by arguing, criticizing, shaming or blaming will usually just make these people feel worse and spend more. The remedy starts with the overspender acknowledging the problem they have and being willing to change. Usually some form of counselling is needed to deal with the underlying causes of the overspending. Lack of self esteem, depression, stress and jealousy of the life styles of others are often root causes. Chronic overspending can affect men as well as women and affects people at all levels of income. Rather than criticism, overspenders need ongoing support and encouragement to change.

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7 March 2011

Survival Guide for Students

Filed under: Manage your Money - Tags: , - @ 4:02 am

Student Survival Tips

Managing money when you are studying is not easy. Student allowances and loans fall far short of covering student expenses and the short fall can be typically around $5-10,000 per year. The gap can be closed by taking a part time job, getting help from family, a bank overdraft, a low interest credit card and, in some cases, extra support from Studylink.

Careful money management is very important. Any income should first be allocated to financial commitments such as rent and shared flat expenses for food, power and phone. Next, set aside some income into a savings account to cover trips home, doctor and dentist bills, course costs and special occasions. Allow yourself a small amount each week for having fun and take this amount out in cash so you know exactly how much you have spent. The remaining amount of income can be used to pay for travel costs, clothing and extra food.

Here are some survival tips to help get you through the year:

  • Check your bank account regularly to avoid charges for insufficient funds. 
  • Pay all your bills on time because if you fall behind, it will be hard to catch up.
  • Don’t borrow money for non-essentials; use savings instead
  • Have a flat account for rent and other shared expenses and appoint one person to make sure everyone’s payment goes in each week and to keep an eye on the balance
  • Cut costs  by using public transport and cooking your own meals
  • Take out insurance for your personal possessions such as your computer and to protect you in the event that you accidentally cause damage to your flat
  • Use the help and support that is available. Most banks have free online budgeting software and universities offer free financial advice.

 

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10 January 2011

Get Rid of Debt in Five Easy Steps

Filed under: Manage your Money - Tags: , - @ 5:13 am

Get Rid of Debt

Starting the New Year with a pile of debt is not a good situation to be in, but it is a common problem. If you are serious about getting ahead financially, then getting rid of debt should be one of your top priorities. Here are five steps that will help you get rid of debt faster:

Step One – Don’t add to the debts you already have. Debt arises when you spend more than you earn. You can avoid adding to your debts by living within your means.

Step Two – Confront your debts by making a list of them. If you have many small debts you might be surprised at what they add up to. Rank your debts in order of priority for payment. Some people prefer to pay off the debts with the highest interest rate first, and some prefer to start by getting rid of the debts that have the shortest repayment period so they feel like they are making progress.

Step Three – Check on any penalties or fees for early repayment. Contact each lender to determine how quickly you can repay your debt without incurring penalties or fees.

Step Four – Consolidate and/or  refinance. Look at options for consolidating your debt and/or refinancing it at a lower interest rate than you are currently paying. If you are struggling to keep up with payments, this may also allow you to repay debts over a slightly longer period of time to make the payments more manageable.

Step Five – Set up an automatic payment to make additional voluntary payments on the first debt on your list. Leave your other debt payments at their minimum level. When the first debt is paid off, start on the next one on the list and keep working through until all debts are repaid.

 

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