UNL Family Economist: In Tough Economy, Take Charge of Finances
January 21, 2009
With bad national economic news at every turn, it is important that people take steps to protect their own finances, a University of Nebraska-Lincoln Extension family economics specialist said.
"A lot of people are in a financial panic right now," said Kathleen Prochaska-Cue. "The first thing for people to do is stop and look at where their money is going."
Cash Flow Planning
Prochaska-Cue encourages cash flow planning, in which individuals and families track their income and expenses carefully for at least three to six months. That will tell them what they are spending money on and how much income they are getting.
Cash flow planning is different from budgeting in that it shows the timing of money flowing in and out in addition to the amounts. It may be useful to do cash flow planning twice a month to reflect biweekly paychecks or additional expenses, she said.
A step-by-step guide to cash flow planning can be found in Prochaska-Cue's NebGuide, Planning and Tracking Income and Expenses Through Time: Cash Flow Planning (G1789).
Cash flow planning can be done on a computer spreadsheet or on a piece of paper, which should be written in pencil so changes can be made, she said. The plan will end up with a total number spent on expenses and a total number for income.
"You get to the bottom line and hope to have a positive number or at least a zero," Prochaska-Cue said. "For most of us it will have a negative number. That's when you go back and look at expenses."
When expenses are higher than income, expenses will need to be cut in areas that are more discretionary, such as entertainment and food, she said. For example, reducing the number of trips to restaurants will help, as will smaller reductions like fewer visits to coffee shops and vending machines.
Another important step for individuals or families is to look at the use of credit, particularly credit cards. People often need to go on a "spending diet" and put more money toward paying off debt.
Debt reduction can be done one of two ways. The common sense approach is paying off a debt with the highest interest rate. However, people may find a better feeling of accomplishment if they pay off the easiest debt first and get that off their radar screen, she said.
"Once you get that one paid off then put as much money as you can to the next one," she said.
Prochaska-Cue also advises people getting a tax refund to use it to pay down debt. UNL's Pay Down Debt Web site has practical guidance to help eliminate debt.
IANR News Service