Paying attention to detail
photo: Unhindered by Talent
The first step in organizing your finances is to determine what it is you’d like to accomplish. You can read about Setting Goals and Keeping Goals on previous posts. After your goals are set, you need to take a good look at your cash flow so that you can figure the steps necessary to fund your goals. I suggest doing this in 3 steps:

  1. Figure out how much you are spending.
  2. Figure out how much you earn and pay in taxes.
  3. Subtract your expenses and taxes from your income for your discretionary income.
This is a Cash Management Analysis. It does two things: 1.) it brings awareness to your spending habits, your taxes, and your income AND 2.) it allows you to plan accordingly. By planning accordingly I mean that when you are faced with a decision to a buy new or used car, or bigger home, or even just to add a monthly cable bill to your expenses, you’ll know exactly how that is going to impact your cash flow. So let’s explore how to figure your cash flow in a little more detail.
Spending – The best way to know where you are spending your money is to import all your credit card and banking transactions for the last 4 months into a FREE online budgeting software. I prefer Mint.com, but there are several out there, including, Yodlee.com, MySpendingPlan.com, and others. Once you’ve opened an account and imported your transactions, you can look at trends in spending.  As you get more data, you’ll know how much goes towards food, auto, and housing expenses. This also tells you where you can lower your expenses if needed. If you’re interested, you can compare your spending habits with that of the rest of the country by looking at the latest Consumer Expenditure Survey. Mint.com does a nice job of suggesting ways to saving money on credit card interest and fees, insurance rates, and others.
Income & Taxes – The best way to do this is to look at Total Income on line 22 of last year’s tax return. Subtract line 60, Total Tax AND any State or Local Taxes from their respective returns to determine After Tax Income.
Discretionary Income – Subtract your expenses from your after tax income to determine how much you have available to fund your goals. This will let you know if you are living above or below your means, and how much you have to put towards your goals.
This analysis lets pre-retirees know how much they can save, and what they may need for an income in retirement. It prevents retirees from running out of money because they know know if they are spending more than their portfolios can handle. Whether you are a pre or post retiree, once you are aware of where your money is going, you can make conscious decisions with your money.
Parting thoughts, the best way to lower your expenses is to cut out unnecessary items and reduce big ticket items, i.e. cars and homes. For more ways to save, see my blog posts Mortgage Habits of Millionaires and Avoiding Blackhole Car Habits.
A modified version of this article was also featured on Investopedia – Cash Flow: The Secret to Organizing Your Finances.