Personal Finance: Cashflow, Budgets & Projections

Some notes on how to get a grasp of your finances and make sure you’re able to achieve what you set out.

Preface & Disclaimer

I’m not a financial advisor. All numbers put forward in this document is for illustrative purposes only.

Managing your finances is hard. I’m not here to give advice or guidance on managing cash, but give some notes on how I manage mine. Do note I’m in Sri Lanka, so the context of financial products and process will defer with your background and jurisdiction. But the core points are still valid.

For me personal finance and financial literacy starts with knowing how your money is being used, this is what we are going to explore in this note.

Step 0: What do you want?

What are your goals, these are justified in doing this exercise. Mine currently are,

• Making sure that my finances are used to achieve my goals (currently it’s renovating the home we bought), and ensure that I’m investing and saving up to do so.
• Being able to carry on in absence of primary income for 5 months. Ie- pay loans, living expenses, etc.

Step 1: Where am I now?

First it’s important to understand how you’re current predicament. To do this the following needs to be categorized first.

• Incomes (Inflows)
  • Salaried Income
  • Interest Income
• Assets
  • Fixed Assets (Long term tangible assets)
    • House
  • Liquid Assets (Highly accessible/cashable assets)
    • Savings Account
    • Current Account
  • Non-Current Assets (Investments with maturity dates over one year)
    • Investment Plan
    • Term Deposits
• Expenses (Outflows)
  • Joint Expenses
  • Personal Expenses
  • Mortgage repayments
  • Investment plan payment

Next step is to figure out how your cash in/out flow works out with these assets. What you need is the following,

Illustrated below is my personal current overall cash flow and how it propagates.

flowchart LR
    I1([Income]) -->|Monthly| S(Savings)
    S -->|Monthly| J(Joint Current Account)
    %%I1P([Income Partner]) -->|Monthly| J
    J --> JE([Join Expenses])
    S -->|Monthly| M(Mortgage)
    S -->|Monthly| C([Credit Card])
    C --> PE([Personal Expenses])
    S -->|Monthly| I(Investment Plan)
    

It’s much more complicated than shown here as sometimes there are hidden links, for example how I’d use my Credit Card for Joint expenses, which I keep track and reconcile.

Step 2: Cashflow/Budget Statement

Now it’s time to make a cashflow/budget statement, with the data you collected you’re able to make a spreadsheet that put’s all into one place.

Sidebar: Budgeting

You’re budget depends on your circumstance and the risks you’re able to take based on that circumstance. But for most of us a good starting point is to take a look at the 50/30/20 Rule

graph LR
    A([Total Income]) --> B[50% Needs]
    A --> C[30% Wants]
    A --> D[20% Savings]

    B --> B1[Housing]
    B --> B2[Utilities]
    B --> B3[Groceries]
    B --> B4[Insurance]

    C --> C1[Dining Out]
    C --> C2[Entertainment]
    C --> C3[Shopping]

    D --> D1[Emergency Fund]
    D --> D2[Retirement Savings]
    D --> D3[Investments]
    

The illustration above shows how outflows can be categorized. With that lets see how our example inflows should be utilized.

Step 3: Basic projections

Now that you’re aware of your inflows and outflows, projections are required to see of how best to achieve your goals in the long run. For now, I’m going to talk about some basic projections based on the net cashflow for now.

Projections are way more complex than this example. A more powerful form of this would be to have all your assets with their indexation and interest, so you’re able to see you’re assets grow. Perhaps that’s diving in too deep for now.

Conclusion

These are notes, a dump of basic ideas to get started on planning your wealth. I started ths post of with a lot of ambition, but condensing all down to a single post in no easy task.

I’m planning to make some easy tools to put these into action, hopefully I’ll hack something out when time permits!