management
Organizing your information
Insurance
In the pages that follow, I will illustrate how you can learn to use all of these.
Safety Nets
Often, a corporation obtains lines of credit to use in the event of a cash flow shortage and only borrows under them if absolutely necessary. You can have similar “safety nets” in place to help cover your household finances: for example, cash to cover three months worth (or more) of your average monthly expenses in interest-bearing savings accounts; certificates of deposit; or other easily liquefiable assets. If having large sums in savings is not feasible, maintain a credit card with a zero balance to use in the event of an emergency. A home equity line of credit (see p. 34) can be used for the same purpose, but again, it is very important not to utilize the credit line until the need arises.
Budgeting and Cash Flow Management
Develop a Budget
Creating an annual realistic budget is hard, especially if you have horses. A budget is easily done on paper or with spreadsheet software (though I find that software budget calculators, or those found online, don’t offer enough categories, nor include horse-related items). First, use the following five steps to find your average total monthly expenditures—the figure upon which you will base your budget (fig. 2.2).
1 Sit down with your checkbook and credit card statements.
2 List your expenditures from the previous twelve months by category. Some categories that may apply to you:Automobile maintenance (service, new tires, oil changes)Automobile insuranceAutomobile loansFederal, state, and local taxes not withheldMortgage paymentsHome equity loansGroceries/household itemsGasElectricityFuel/wood for heatWater and utilitiesTelephoneCell phoneClothing/dry cleaningPersonal care (haircuts, etc.)Recreation and entertainmentVacationSpending money and lunchesSchool and sports activities for childrenFarrierVeterinarian expenses for all animalsMedications for domestic animals (flea and tick control, heartworm preventive, etc.)Wormer, fly spray, ointmentsBoarding feesHayGrain and suppliesBeddingHorse shows and related attireRiding instructionTraining clinicsPasture management (lime, fertilizer, seed)Credit card paymentsUninsured medical and dental expenses, co-pays and prescriptionsHealth insuranceLife insuranceDisability insuranceHorse owner’s liability insuranceRetirement fundsInvestment fundsChristmas gifts, birthday gifts
3 Then, go through your checkbook and credit card statements and list the relevant monthly expenditures made over the last year in each category. (Items that do not need to be paid for within the next year should not be included. However, if there are purchases that you know you will be making later in the year, such as new tires, include the appropriate amount in your yearly automobile maintenance figure, or list it as a separate item.) When you are done, each category should have 12 numbers, an amount for each month.
4 In the first category, add the 12 numbers, and then divide by 12. The resulting figure is your average monthly expenditure for that category. Repeat this step for the remaining categories.
5 Finally, add all the average monthly expenditures together. The resulting figure is your total average monthly expenditure.
TOTAL AVERAGE MONTHLY EXPENDITURE WORKSHEET FOR TWO CATEGORIES
| Grain & Supplies | |
| Jan | $155 |
| Feb | 140 |
| Mar | 120 |
| Apr | 105 |
| May | 95 |
| June | 90 |
| July | 90 |
| Aug | 110 |
| Sept | 130 |
| Oct | 135 |
| Nov | 135 |
| Dec | 140 |
| Total | $1,445 |
| Avg. monthly expenditure: | $120 |
| Groceries & Household Items | |
| Jan | $400 |
| Feb | 600 |
| Mar | 350 |
| Apr | 375 |
| May | 450 |
| June | 400 |
| July | 500 |
| Aug | 600 |
| Sept | 500 |
| Oct | 550 |
| Nov | 450 |
| Dec | 400 |
| Total | $5,575 |
| Avg. monthly expenditure: | $465 |
Total avg. monthly expenditure (for these two categories): $120 + $465 = $585
2.2
Next, determine your average monthly income, which may include take-home pay, dividends, and interest. Don’t include bonuses or overtime in this figure unless they are guaranteed.
The household depicted here owns a farm and two horses. This month, it is about $350 over budget. It needs to increase the amount budgeted toward utilities, and decrease household and grocery expenditures.
Compare the expenditure and monthly income figures. If expenditures are greater than income, either reduce expenses or increase income. If income is greater than expenditures, then increase savings, retirement plans, and investments.
One way to track expenses in a specific category is to print or copy twelve monthly budget sheets (one for each month), and at the end of each month, record the actual amounts spent. Comparing your budgeted figures to the actual numbers helps you gauge how realistic and attainable your budget is. There is room for improvement in any category where expenditures exceed budgeted amounts. (See fig. 2.3 for an example of a monthly budget worksheet.)
Managing Cash Flow
Unfortunately, coming up with a workable budget does not help you manage your cash flow. For this, it’s practical to draw up a cash requirement worksheet (figs. 2.4 A—C). With this worksheet, you can create a separate, special bill-paying account (either checking or savings) to put aside cash for items that become due quarterly, semi-annually, or annually and ensure you have enough money to cover those larger bills. Think of your special bill-paying account as an escrow♦ account for your future obligations.
The cash requirement worksheet is a simple tool that can be designed with spreadsheet software, or simply drawn on paper. The amount saved monthly toward payment of a bill is entered and then crossed out when the bill is paid. The amount in your special bill-paying account should equal the total sum of the columns on this worksheet.
The cash requirement worksheet is just one element in your overall cash-management system. A simple operating cash flow statement helps you see the “big picture” where your money is concerned. See fig. 2.5 for a cash flow statement showing the months of January, February, and March for this household. (Blank monthly budget and cash flow requirement worksheets are available in the Appendix for you to use.) The special bill-paying account outlined in figs. 2.4 A—C is listed as a “cash account” on the statement of cash flow.
SO YOU KNOW…
