- 1). Define your financial goals in terms of time frame and total costs. Common long-term financial goals may include saving up enough resources to provide for a first-time home purchase, college tuition expenses or a comfortable retirement. In the short term, you may be looking to eliminate all $5,000 worth of credit card debt within the next year.
- 2). Use a financial calculator to make savings projections. The calculator lets you toggle through different projected returns, interest rates and time frames. With these estimates, you can determine the amount of money that should be saved regularly to achieve a particular goal.
- 3). Review your most recent bank statements and pay stubs to figure out your amount of free monthly cash flow. To calculate the free cash flow available, subtract your monthly expenses from your monthly income. At this point, you can determine whether your financial goals are realistic. If your goals appear to be out of reach, cut expenses and improve your free cash flow.
- 4). Categorize your expenses as either committed or discretionary expenses. Committed expenses are necessary for survival and to avoid loan default. They include groceries, rent, utilities, transportation costs and minimum debt payments. Discretionary items, such as cable television and designer clothes, are not necessary and rarely add value to your bottom line.
- 5). Limit discretionary spending within your cash management proposal. If necessary, you may need to cut discretionary spending altogether to meet your goals.
- 6). Evaluate the cost benefits of a lifestyle change that will result in significantly lower committed expenses. You may decide to take the one-time costs of moving expenses, for example, when moving into a smaller apartment that will save you $300 each month in rent.
- 7). Calculate a new free cash flow that takes the adjustments made in your current budget into account.
- 8). List your outstanding debt balances according to interest rates. Make minimum payments on your low-interest-rate debt so you can preserve cash to quickly pay off your most expensive credit card debt. While paying off debt, strive to accumulate six months' worth of living expenses in cash reserves.
- 9). Take out insurance policies on your health and life. Make provisions for these insurance premiums within your cash management proposal.
- 10
Save money in a diversified portfolio of stocks and bonds. For a beginning investor, the U.S. Securities and Exchange Commission (SEC) recommends mutual funds for professional money management and automatic diversification.
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