As is often the case, many of your short- and long-term goals are dependent on your ability to effectively manage your cash flow. Finite income sources pose challenges to every budget, and living within one’s means is essential to a financially stable lifestyle. Currently you have done a great job of limiting your debt, but many of your goals will undoubtedly add to your overall debt load.
One of the best ways to manage cash flow is to adopt a “bucket” approach utilized by cash management systems such as First Step Cash Management™. With this approach you will use several accounts deliberately set up for specific purposes. For instance, you could have an account set up for your many monthly obligations, a separate account for rent/mortgage payments, an account set up for auto related expenses, and even an account for travel, or other lifestyle desires. We will discuss the specific accounts in more detail as we work through your various goals.
Before we can proceed further, it is important to understand the current financial picture as you have described it.
As you work towards your various goals, it will be imperative that you gain a better understanding of your monthly expenses. Much of what you have reported is simply part of sustaining a monthly budget, but there are more than $670 of expenses in your reported budget (under your misc. category) that need to be closely examined to determine if there is additional room for saving. You should also look for other expenditures that can be examined to see if you can get by with spending less. In order to reach the goals you have stated, you can do one of two things — earn more or spend less (and devote the extra dollars to the stated goals). You have less control over the monthly income than you do the expenses, so that seems like a good place to start. And, when income does increase over time, dedicate as much of those raises as possible to additional savings. For starters, you should target 10 percent of your monthly income to be saved towards your goals. For the two of you, that means carving out about $360 in monthly expenses and putting that money away. It won’t be easy at first, but you will be building the habits that will allow you to buy your first home, and fund the purchase of a business for Ethan.
In addition to monthly savings, you should look at your variable income sources as savings opportunities, as well. Currently, Ethan is eligible for a quarterly bonus equal to 10 percent of shop profits. He estimated that this averages $3,000 per quarter when things are going well. You should dedicate these bonus payments to your savings goals. This same treatment can be applied to other “windfall” payments, such as any tax refunds you may receive year to year (more on that in the tax section).
In the beginning, you will likely begin saving cash to a savings account or money market account that will be multi-purpose. Some of that cash may be needed for a home purchase, some for an engagement ring purchase or to pay for wedding costs. This fund would also be considered your emergency reserve fund for unanticipated expenses. As you become more comfortable with the savings plan, you can begin to increase the monthly amounts dedicated towards your goals. The most important step is that you are actually saving from your income towards these goals, and that the money is building up for future use. Once we get through some of the short-term goals, these savings habits will be used to begin putting money away towards your long-term goals, including education and retirement.