After tallying your assets against your liabilities in the exercise to compute your net worth, the next important second step in the financial planning process would be to prepare and analyze your cash flow statement. The following paragraphs explain why the cash flow statement analysis exercise is an essential element in the financial planning process.
The analysis and monitoring of your cash flow and the organizing of your budget to ensure a positive cash flow position will enable you to take whatever excess cash over your expenditure to allocate it to your savings fund and investment plan to improve your net worth.
Common daily expenditures would include your utilities bills (electricity, water & telephone), groceries bills and transportation bills among others. But the real bane to any financial plan at the initial stage of financial planning of a young individual would be to the monthly repayments to offset any housing loan, car loan or in the worse scenario credit cards debts that may have resulted due a high living lifestyle beyond his or her means.
If in this scenario, the first priority at this financial planning stage would be to tackle these loans / debts head on by adhering to the following strategy:-
1. Tally the total monthly repayment required to pay off your loans / debts. Then budget your monthly expenses to include this monthly repayment required without going into deficit. Keep paying this same amount but reallocating when some loans get paid off.
2. If you have additional cash for the month, always pay off the loan with highest interest rate or the smallest loan first.
3. If they are any need to delay making payment due a lack of cash for the month, do so with the one with the lowest interest rate.
If you are in a better enviable debt free position, then your priority would be a budget which includes a monthly allocation for an emergency buffer fund. This fund is necessary to take care of 6-9 months expenditure in the event you lose your job or in the event of any unforeseen and unwarranted event occurring. During this period, unnecessary expenses should be avoided and delayed gratification need to be the order of the day.
With the emergency buffer in place, only then will you have a clear mind to proceed on the path to seek investment opportunities that abound in the financial market. The allocation earlier set aside in your budget for the emergency buffer can now be channeled to the various investment instruments available in the market such as fixed deposits, bonds and the equities market.
Hence, the preparation followed by the analysis of your cash flow statement will help you decide on the move to the next important step in the financial planning process, i.e. seeking investment opportunities to improve your net worth and to achieve your financial goals.