You can determine where your money comes from, and where it goes over a period of time by using a budget, an important tool for controlling expenses and realizing what areas of spending need to be curbed or increased, depending on your goals.

      Your ability to manage cash (called cash flow) goes hand-in-hand with a good budget. Liquidity (the conversion of assets to cash through sale or exchange—a liquid asset is one that is easily converted) is extremely important to solvency; you need to gauge and time your cash flow so your debt obligations are met. You can have plenty of assets on your balance sheet, but if they are not liquid, they are not available at that time and you can end up falling behind on your payments, in foreclosure, or filing bankruptcy.

FINANCIAL RISK MANAGEMENT TOOLS

      Brett Alexander Zwerdling, a partner in the firm of Zwerdling and Oppleman in Richmond, Virginia, specializes in bankruptcy. When asked how people end up in bankruptcy, he replies, “It is not so much because of what people do or don’t do, it is a matter of circumstance.”

      You can’t always control the circumstances that can leave you vulnerable: these may include becoming unemployed, suffering a disability, or losing a spouse and corresponding income. Other factors, such as inflation and economic problems—both within the United States and globally—can have a profound impact on your financial situation. There are tools you can use to guard against financial upset, however. The most common are:

      Safety nets

      Budgeting and cash flow management

      Debt management

      Credit 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).

       TOTAL AVERAGE MONTHLY EXPENDITURE WORKSHEET FOR TWO CATEGORIES

       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.