What is financial planning ?

Determining cash flow

You can’t create a financial plan without knowing where your money is going—and when. Documenting transactions—the flow of cash in and out—will help you determine how much you need every month for necessities, how much might be left for saving and investing, and even where you can cut back a little—or a lot.

One way to get this done is to skim through your checking account and credit card statements. Collectively, they should provide a fairly complete history of your spending.

If your expenses vary a lot seasonally, then it’s best to go through an entire year—counting up all the expenditures in each category and then dividing by 12 to get an average monthly estimate of your spending. This way, you won’t underestimate or overestimate what you spend on utilities, nor will you forget to account for holiday gifts or a vacation.

Document how much you’ve paid over a year in basic housing expenses like rent or mortgage payments, utilities, credit card interest, and even home furnishings. Add categories for food, clothing, transportation, medical insurance, and non-covered medical expenses, then document separately your real spending on entertainment, dining out, and vacation travel.

As you look over your own financial records, your personal spending categories will stand out. You may have an expensive hobby or a pampered pet. Document the costs.

Once you add up all these numbers for a year and then divide by 12, you’ll know exactly what your cash flow has been.

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