It's all in the numbers

This week we're going to demonstrate how to prepare a cash budget. A cash budget is a prediction of all cash coming in and all cash going out (resulting in a 'net cash' position) and is essential if you are going to achieve your property investment goals.

The cash budget provides you with essential knowledge about what you earn and even more importantly, what you spend. 

 

It is not what you earn that is important, it is what you do with what you earn.

One of the objectives in preparing a cash budget is to establish how much you can afford to pay yourself before paying anything else. In other words, you need to know how much you can set aside for saving/investment each week. This requires self-discipline.

Once you establish how much you are going to set aside for investing, you must do this first every time you are paid or receive money. Do not think about what you might spend this money on...the money is not for spending, it is for saving.

This is an essential part in developing the required self-discipline to building true wealth. Do not put it off, commence saving immediately. Remember procrastination is a major cause of failure.

 

"Remember procrastination is a major cause of failure."

If you are going to achieve true financial independence, you need to adopt a new investment paradigm by putting aside money to invest first rather than adopt the traditional approach where you invest what is left after paying your bills...and of course, this usually amounts to zero.

If you've read 'The Richest Man in Babylon' (if you haven't, you MUST), you'll remember Clason's first and second cures for a lean purse: 

 

"Start thy purse to fattening and control thy expenditure." - George S. Clason

The most effective way to ensure you understand the process of preparing a cash budget, is to prepare one. When preparing your cash budget you should put together a list of cash outgoings first.

You should then split outgoings (or expenses) into "variable" (ie expenses that change all the time, eg the cost of water is based on the amount we use and that changes consistently) and "fixed" (ie expenses that do not change, eg the amount of rent we pay on a house). This allows you to analyse the results more effectively. It is more likely that variable expenses can be reduced or controlled.

Therefore once you complete your cash budget, you should look to reduce variable expenses first. After entering all cash coming in and all cash going out, you are left with the difference which represents the 'excess/deficit'. This is the amount of cash you have left over (the excess) or the amount you will over-spend (the deficit).

When preparing your cash budget be sure to include all expenditure - including that cappuccino each day. Now get to it and prepare your budget immediately.

 

"We think in generalities, but we live in detail" - Alfred North Whitehead

Here's to your property investing success.

 

 

Garry lives on the sunny Gold Coast in Queensland with his wife and two children. Garry is a business man committed to helping other achieve their financial goals.

Garry and the team at Property Buyers Australia are excited to announce thier new Virtual Buyers Agent service designed to provide sound analysis to ensure you buy the right property in the right location at the right price. Check it out here.

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