It’s no secret. The easiest way to be successful with a cash management plan is to develop a systematic and disciplined approach, that only takes a few minutes each week to maintain.
Any good cash management plan revolves around the four A's — Accounting, Analysis, Allocation, and Adjustment. Here is how the four A’s can work for you:
Accounting quite simply involves gathering all your relevant financial information together and keeping it on hand for future reference, such as income and expenses — and organizing it as to give you a clear picture of your financial situation.
Analysis boils down to reviewing your financial situation once you have accounted for all your income and expenses. You will most likely find yourself with either a shortfall or a surplus. Ideally, you should be spending less than you earn. One of the key elements in analyzing your financial situation is to look for ways to reduce your expenses. This can help to free up cash that can be invested in the long term or used to pay off fixed debt.
For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off ten years early and save you thousands of dollars in interest payments.
Allocation involves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your needs and your wants. If you need to reduce your expenses, you may want to start out by cutting back on your discretionary spending. This can also help free up cash that can be invested in the long term or used to pay off fixed debt.
Adjustment involves reviewing your income and expenses periodically and making changes when necessary. Above all, be flexible. Any budget that is too rigid is likely to fail.
Using the four A's is an excellent way to monitor your financial situation to help ensure that you are on the right track to meet your financial goals. We’ll even throw in another A for good measure... Action, because without it, nothing gets done!
If you’d like to act, our Vesta team is here to help you. Contact us today to see how we can help you reach your goals!
-Written by Nick Deering, MBA, CFP®, CVA®, CLTC | Manager