In financial planning, we start with a few important pieces of information: a snapshot of what you own versus what you owe (balance sheet), and an overview of your cash inflows versus your outflows (statement of cash flow).
Since Sara is a renter, her major assets currently consist of the money she has been contributing to her 401(k) and her current car.
One of the areas of analysis and concern are the items on the negative side of the balance sheet ledger. She currently has five credit cards with balances, a retirement plan loan, and a deferred payment plan from the school where she received her master’s degree. This is not a student loan account, but rather money that Sara has agreed to pay back in the future.
With three of the four children still at home, Sara is worried if the money coming will be able to cover the needs of her family.
Her feeling is that there is nothing wasted and nothing to spare. We covered the expenses Sara was able to track. Admittedly she could do a more complete job, as we discovered that there is likely around $700 per month that is unaccounted for.
Counting the pennies and small transactions isn’t necessary in creating a cash flow statement, but having the major expense items available can make it easier to review the opportunities for improvement. One solution is to have a budget for ‘cash expenses.’ This may be money for any minor, regular expenses you pay cash for, such as children’s haircuts. By creating a budget for that amount, we are better able to understand where our money is going, without needing to break out our cash flow into too many minor categories.
Other major concerns are the addition of the deferred payment plan payback of $157 per month, and the need to fit a new car payment into the plan.