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One of the most important elements of personal financial planning is effective cash flow forecasting. In life, personal money shortfalls can be extremely stressful and hold the potential to cause major issues. As such, cash flow forecasting is an important part of achieving a sustainable financial plan. Everyone has different long-term financial objectives, however, what most people share is the desire to achieve long-term financial security.
The old saying ‘save for a rainy day’ is a key part of financial planning. You never know when life will throw up a nasty surprise. It’s important to be as prepared as possible for certain events which can be extremely costly. This can be anything from your car breaking down to unexpected medical treatment costs.
To develop a suitable cash flow forecast you need to map out everything in your life. To start with you need to look at your spending patterns in the past on a 12-month average. You might only spend 50% of your monthly income in March but spend 300% in December. So, you need to look at the whole year. This includes birthdays, holidays, special events, unexpected costs, regular outgoings, literally everything you spend money on. Once you’ve got a figure for this you can match it against your income from your job and anything other sources of income you may have.
Now compare. Many people find they spend in excess of their annual income leading to ever-increasing forms of debt i.e. credit cards and overdrafts. It’s nothing to be ashamed about, most of us have been there at some point or another, if it can be avoided through good financial planning, then it should be. The first step in financial planning should always be to attempt to eliminate your short-term liabilities.
Your cash flow forecast can be minimal or all-encompassing depending on your personal circumstances and requirements. Most people and most families have pretty repetitive monthly inflows and outflows as we touched upon above. However, it’s the expenditures which are unexpected which have the potential to throw a spanner in the works. Because of this, you must include provisions for unexpected costs within your regular outgoings into a liquid savings fund which can be accessed easily if it’s ever required.
Mapping out a forecast for 12 months is a good long-term place to start, however, it’s good to take small steps. To make things easier, start with daily targets for expenditure to hit weekly budgets all within the 12-month goal. Bite-size targets are satisfying when hit and make your progress more identifiable. There are now apps on your smartphone which can help you track your spending. Moreover, there are also certain banking options which make you automatically save when you spend.
Cash flow forecasting really is at the heart of financial planning. The stronger your plan today, the easier life will be tomorrow.
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