Over the last 4 years, I have been working in finance-related roles for a global not-for-profit organisation, a multi-national company and a start-up. I have been learning and practising financial management for companies. However, even though I have spent the last 4 years working in finance and almost the last 6 years studying and taking formal education in finance, none of those ever taught me how I should manage my own personal finances. To be honest, I always thought since I knew finance I didn’t have to invest a lot of time to manage my own finances.
Whenever we think about managing personal finances, many of us try to do it in our heads, and maybe here and there with some reminders and notes. This is because it seems simple, for a majority of us, we only have one main income stream, which is our salary or allowance and then we have our usual expenses such as rent, utility bills, food expenses and personal care expenses.
But if you are reading this now, that means there is something that is bothering you about personal finance management. Most probably it could be that you are in debt such as credit card debt and you want to manage your finances better so you can pay your debt and have peace of mind. Or maybe, it could be that you have certain savings or investment goals that you want to achieve such as you want to travel, buy something or invest in something.
I first started to really focus on my personal finance management when I started to live abroad, this is especially required when you are not familiar with the pattern of expenses and spending habits. Anyway, whichever objective you might have, whether it be to pay off debt, manage expenses, save or invest, I hope my guide could help you to achieve it.
Whenever people talk about personal finance management, they talk about having a budget and sticking to the budget. While I would eventually talk about budgets, I would first take a different approach and I would also link you to the tools which I use so that you can also make use of those. But remember this is not a super simple method, but I believe you should invest some time to manage your finances because at the end of the day it allows you to understand yourself better, to be at peace, have financial freedom and maybe to make more money too ;)
Every week I would spend about 2–3 hours analysing and managing my finances, but I do make this time investment so that I can have a strong financial management system that works to continuously improve my financial state.
In this guide, I follow a very basic principle, which I will tell at the start and explain it deeper as we progress. This will sound simple and straightforward but you do need to spend time on it.
Okay, so the principle is: Think of yourself as a company and manage personal finances as similar to managing finances of a company.
When you are managing the finances of a company, you track your expenses, you continuously work on your revenue, you follow a budget, you track your profit or loss, you track your assets and liabilities, and you track your cash flow. Companies hire professionals to manage the finances because it is important. So if you start treating yourself as a company, track your cash flow and follow a budget, things will get really good.
As an individual you do not need to do all of the things a company does. This is because companies have to report to investors and abide by law to generate financial statements for transparency.
But there two important important things that you need to do, that is track your cash flow and follow a budget. Forget the budget (at least at this stage), I have heard on the internet whenever people talk about personal finance management the first thing they talk about is creating a budget, following a budget, but a budget comes second. The first and the most important thing is a cash flow tracker. This is even true for a company, a company that tracks its cash flow is for sure better off than a company that has a budget but does not track cash flow. Without building the habit to track cash flow it is fairly impossible to stick to a budget. With this being said, let’s directly move into learning how to track cash flow.
Cashflow Tracker
In this guide I will provide tools in both Google Sheets and Notion. Many are now choosing Notion over other tools because Notion seem to bring a sense of centralisation for many things. The tools that I will present to you today are templates that I have created so anyone can use it, and they allow scope for customisation.
Before we jump into the tools, I want to explain about cashflow. Cashflow refers to the net (inflow minus outflow) amount of cash (when I say cash it’s not just physical cash, it could be bank deposits, PayPal transfers or even crypto currency).
First, let’s look at cash inflow or money inflow,
This part is really important. There is something important you need to learn about money, when you receive money essentially one of the three things will happen to all money. This is inevitable.
- Spend
- Save
- Invest
Once you receive money you will either spend it, it maybe to buy something, it maybe to pay off debt, it maybe for a donation or, you will save it, that means the money will still belong to you, but you just preserve it either in your house or inside a bank account. The third is, you will invest the money. What it essentially means is that you will give the money to someone to make use of it and return you back with more money, which may or may not happen depending on whom you give it to.
Whenever you get income, say your monthly salary, how many of you think about the 3 things that will happen to that money? or do you even allocate that money to these 3 things? If you start to look at money in this perspective, it will change your financial management.
Again this part is really important. Someone might ask, but Navo how do you divide the income you get into these 3 areas? what ratio do you use? Good question, while the choice is certainly yours, based on your goals, a rule of thumb would be 60/20/20. To me personally, I use a ratio of 60/10/30. What it means is that from any income i get, i limit it to a maximum of 60% for spending, then 10% I use for savings, and 30% in investments. This is because personally I am not a huge fan of savings, as long as I am sure I have money for an emergency, I try to invest more. But typically if you have debt, your spending category can even go upto about 70%. A person who has a lot of debt maybe have a ratio of about 70/10/20 or even 80/10/10.
The spending would also cover debt payments. If you notice something here, even if I have debt I would still put some of my money to savings and investments. This can certainly depend if you have high interest debt such as huge amounts of credit card debt.
I started to explain about the cash flow tracker and went to a very deep conversation about money, but I think it is worth it to have this clarity about the money you get. By the way, I will post another guide on how to invest, so you know how to effectively use the money to make more money. I will not guide you to save, saving is straightforward, keep the money for emergencies and don’t touch it unless it is an emergency. No, buying a new model of phone is not an emergency, this is like if you get a medical emergency or you lost your job.
Tracking cash flow means you track the inflows, then understand in which 3 areas those income is going to go and then track how you do in each of those three areas.
It might still look straightforward, but then why do so many people struggle to keep track of cash flow, this is because people spend before they get income. For example, you use your credit cards to spend for the month, then get your salary at the end of the month. The logic which I was telling before gets complicated because I took you through a path of first getting income and then allocating it into one of the three. But in reality, the category of spending might happen earlier. This is not bad, I use credit cards all the time, and credit cards give almost about 50 days to settle whatever you spent without any interest, so why not?. But what happens to a lot of people is that they spend before and once they get the money they spend again and fall into more and more debt and tougher situations.
So now let’s go through the Cash flow management tool. You can follow the Notion template and its explanation here. The detailed explanation of the tracker can be found with comments there itself.
Before we wrap up lets see if we have achieved our objective. The reason that you are reading this guide is because you need to manage your personal finances effectively. And the solution provided by this guide is to manage your finances similar to how a company would manage its cash flow. The guide highlights the most important task of managing personal finances is to track cash flow and understand clearly what income means and how to effectively use income to achieve your goals. With that lets look at a summary and wrap up.
Summary
Let’s summarise what we have learnt in this guide.
- The best way to manage personal finances is to thinking about yourself as a company and manage it.
- To manage personal finances you need two tools. A cash flow tracker and a budget.
- Cashflow is the net cash you have after inflow and outflow.
- There are 3 things that can happen to your cash inflows, spend, save or invest.
- You should always try to consciously allocate your cash inflows to each of these 3 aspects.
- A rule of thumb to allocate could be 60/20/20.
- The cashflow tracker will allow you to track how you allocate this money to each of the aspects.
