Mastering your money: the seven key principles of cashflow management

The cost of living in South Africa has increased dramatically over the past 10 years. These increases in the cost of things we use and need daily are stressful for both those who are working and raising families, and retirees who are often living on fixed pensions.

In times like these, it is very helpful to be in control of your monthly cash flow and to plan well for the short to medium term.

Here are seven key principles that can help you manage your cash flow:

1.  Pay yourself first

When you receive your monthly income, you need to save and invest first and then spend the rest. This will ensure that your short-term, medium-term and long-term goals are provided for. When your goals are provided for you can enjoy your money without any guilt or worry.

2.  Plan how you will spend

Having a plan for how you will spend your money - weekly, monthly and annually - gives you both a structure and awareness of how you are spending. There is nothing worse than suddenly remembering an important expense coming up soon and worrying about whether you will be able to afford it.

3.  Provide for all expenses

When you plan your spending, make sure you include all those irregular expenses that you have to cater for throughout the year. Bigger expenses, such as car services, annual subscriptions, annual veterinary visits, Christmas bonuses for your employees, annual school fee payments and even fun things like holidays tend to sneak up on us if we don’t have a plan to provide for them.

4.  Track your spending  

Tracking your actual spending against your spending plan is the glue that holds everything together. Consider what you allocated for a particular expense and what you actually spent. If there is a difference, you need to understand why. Did you overspend? Or did you over allocate or under allocate? You need to manage this dynamically as time goes on, adjusting your spending plan to offset shortfalls or put surpluses to good use.

5.  Include some flexibility

Each month is subtly different and this means you need some flexibility in your spending plan. Think about three key components every month: Your savings and investments, your fixed expenses and your discretionary spending.

If you pay yourself first, your savings and investments are accounted for upfront.

Fixed expenses are your essentials, like housing and other debit orders that go off your account every month come whatever may.

Discretionary spending is the money you can spend on food and entertainment. While basic food is an essential expense, there is often a lot of discretion in what we put in the grocery basket. You can redo your budget for this discretionary spending every month to adjust it based on what is happening in your life each month. This will ensure that you seldom overspend.

6.  Having an emergency savings fund

Setting aside at least three to six months of your monthly expenses in a relatively easy-to-access cash savings account that gives you a reasonable yield, is an essential part of your financial planning. This emergency fund is your last line of defense that will help you weather any unexpected financial storms – the kind that affect us all from time to time.

If an emergency forces you to tap into your savings, make plans to replenish it as quickly as you can.

7.  Review your spending plan

You should review your fixed expenses at least once a year and whenever your life changes. What was essential and what served you and your family well in the past may no longer be needed. Reconsidering your essential expenses every year and matching them to your needs could save you some money and boost your monthly cash flow.