Chapter 5. Review cash flow and set up a budget
Once the Tracking process is complete for money coming in and money going out, it is time to look at your cash flow analysis and make decisions regarding how to reduce expenditures so that total spending (fixed and variable) will be no more than 90% of your net income (your hard earned money) to allow for a saving equal to at least 10% of total monthly net income.
Cash flow analysis allows you to trim expenses marked "WANTS" that you can do without, and revisit expenses marked "NEEDS" to see if any wants are disguising themselves as needs. The goal here is to strip your expenditures to the bare minimum as necessary to make ends meet. This process is critical especially for adult learners who are going back to school (Refer our Adult learners module in this series). Their expenditures are more complex than those of traditional students, but the concept of balancing income and expenses is the same for all students. Here is the formula for a healthy budget:
How to
There are numerous methods of budgeting, including:
- Zero-sum budget method
- Accounts for every dollar of income compared to expenses equaling to sum of zero each month
- 50/50 method
- Divides expenses into two distinct categories of fixed and variables
- Cash envelope method
- Where cash is kept in envelops for specific expenditures each month
- Percentage of net income method
- We find this method to be the easiest, least stressful, and the simplest method to create a sustainable budget
- Allows you to control the allocation of your income to your expenditures as you maintain your preferred standard of living
- Keep in mind that those percentages are a guide that can be modified and adjusted to meet each location's cost of living and economic instability
Example of a healthy budget using the percentage allocation method
Practice
Now that you understand how to create a budget, let's practice putting a budget together! You can get a template for budgeting here
Download template for budgeting here and start to practice!
How does your budget look? Were you able to identify spending leaks? Were you able to trim unnecessary expenditures? Were you able to allow for saving? Think about paying it forward and teach someone how to create a budget that focuses on a future of financial security and freedom!
Congratulations! Now Test your knowledge about Budgeting!
Would you like to review again? You can start over at Introduction.
To review the full module on Budgeting, click here.
The Penn State Sokolov-Miller Family Financial and Life Skills Center hopes you have enjoyed this module in the MoneyCounts: A Penn State Financial Literacy Series. Please tell us how we can serve you better, leave us feedback, ask a question, or request additional information at: finlit@psu.edu