Take all your tally sheets and put them in front of you. If you go online and look up this article on Cash Flow on ChesapeakeCurrent.com, you’ll find a “Cash Flow Worksheet.” This shows you how much you are taking in as income and how much you are spending on a monthly basis and provides a snapshot of where you are today and gives you some planning data.
These worksheets will help you create a successful financial plan. With these worksheets, you should be able to figure out what you earn, what you spend, where your money has been going, how much you could save, and what your investments look like.
We’ve discussed Jane and her relationship with money. She has identified her motivations and has now created some file folders and tally sheets for her income and expenses. Jane is a 33-year-old legal secretary who bought her first home two years ago. She works in Washington, D.C. and lives in Virginia. She makes a good living but is constantly broke, living from paycheck to paycheck. Let’s take a look at Jane’s cash flow worksheet to see why she’s in need of a plan:
CASH FLOW WORKSHEET FOR JANE
INCOME Salary $ 3,333.33 $ 40,000.00
Bonuses 100.00 2,000.00
TOTAL CASH $ 3,433.33 $ 42,000.00
EXPENSES Home mortgage 1,065.00 12,780.00
Electricity 80.00 960.00
Water/Sewer 25.00 300.00
Property Taxes 141.60 1,699.20
Car Payments 300.00 3,600.00
Car Maintenance 12.00 144.00
Gas for car 100.00 1,200.00
Parking Fees 165.00 1,980.00
Credit Card 1 20.00 900.00
Credit Card 2 35.00 1,500.00
Credit Card 3 10.00 100.00
Life Insurance 15.00 180.00
Health Insurance 35.00 420.00
Car Insurance 25.00 300.00
Home insurance 33.00 396.00
Income Taxes 933.00 11,196.00
Employment Taxes 240.00 2,880.00
Clothing 250.00 3,000.00
Food 200.00 2,400.00
TOTAL EXPENSES ($ 3,684.60) ($ 45,935.20)
Jane sees she is spending $251.27 more than she has every month. No wonder she’s got problems. Jane has no savings and no funds for entertainment. At least Jane can now see her situation. It shows that her largest expense categories are for the home mortgage, taxes and her car. The next largest category is clothing.
She’s surprised by what it costs to commute. Adding the car payment, parking, gas and insurance, her commuting costs are about $590 a month. Can she reduce those costs? Yes, Jane is lucky and can take the subway to work for $5 a day and save the parking fees and a lot of the gas costs. That would reduce her commuting expenses from $265 a month to $120 for public transportation and some gas for the car, for a savings of $145 a month.
Jane also sees that her clothing expenses far outstrip her earnings and she determines not to spend anything on new clothes for at least three months. This reduces the clothing expense to zero, a savings of $250 a month. From these two strategies, Jane saves $395 a month—puting her in the black.
Jane’s made a good start. She can now set aside approximately $134 per month to pay other debt. What Jane now sees troubles her—she has three credit cards on which she’s paying only the minimum due every month, and she has no savings.
For many, many people, men and women, credit cards are sinister. What they represent to many is financial security—not the kind that allows you some flexibility in emergency situations, but the kind that allows you to purchase something on time, the kind that allows you to live beyond your means. And who has not fallen prey to easy money? It’s so simple to pull out a credit card and buy, buy, buy. When the bills come, it’s easy to pay the minimum due and let the balance go and grow.
Only when you divorce the concept of financial security from consumer debt will you be able to take control of your finances. Do you know the interest rates you are paying? Look at your credit card statements. Many cards carry interest rates into the double digits, making it virtually impossible to ever pay off debt with the minimum payments. Consumer debt is a hole into which any person attempting to take control of their financial life cannot afford to fall. Jane is being charged an average of 17.5% interest on her credit cards! By really examining her financial position, Jane learns the first rule of planning.
My advice is: only use your credit card if you can pay off the full amount within 30 days.
Why? The carrying costs that the bank charges you for the card can be huge—up to 24%. Many cards carry an interest rate of 17.5-18%. Paying only the minimum on your credit cards means you are paying that much interest on your balance every month.
Since her plan now shows that she is in the black by $134 each month, Jane makes her own credit card payment plan for the next three months. She decides to keep only one card. She’ll pay off the smaller card first, at $100 next month. And, next month she’ll add $34 to the largest credit card debt payment. Then she’ll cancel that card. In the second month, she’ll take her $134 amount and pay extra on both remaining credit cards. She’ll do this until she pays them off. And, she’ll make no more charges until they are paid off, in about a year and a half. In 18 months, Jane can be debt free!
But, Jane may have other ways of accelerating her debt payoff. To think about how she might do this, Jane needs to know the status of her credit.
Credit is the tool that enables you to get into debt – to borrow money from banks, retail stores, etc. The better your credit, the lower the interest rate —because they assume you’ll pay off your debts faster and timelier than someone with a history of paying off debts poorly.
Do you know what your credit history looks like? Here’s how to get a FREE copy of your credit report:
- Call the credit agency. They are required to give you a free copy of your credit report once a year, upon your request.
- Try the internet at FreeCreditReport.com or other sources.
Jane was lucky—she came to the planning process before her credit was adversely affected by late payments. These are very costly.
Jane notices several errors on her credit report. She immediately puts planning rule number two into effect: constantly review and correct your personal credit report. Make sure it is excellent. If Jane wants to refinance her home to take advantage of lower interest rates or make any other large purchase (another car, for example), she needs an unblemished credit record.
Jane writes a letter correcting all the errors in the credit report and sends it off. Two months later, she obtains another copy of her credit report. She notices that some but not all of the errors on the report have been corrected. She writes another letter sending the corrections. Jane’s plan is to constantly monitor her credit report so that all corrections are made. That’s a good approach.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.