Guide to Cash and Debt Management
Do you have enough money in your savings account? Most people will say they don't. Having adequate savings is important for financial stability. Emergencies may come up, and you need enough money for future needs like retirement.
The habit for saving money is taking control of your expenses. It's best to create a plan that allows you to examine where you're spending your money and align them with your priorities. In this guide to cash management, we break down what a cash and debt management plan is, how to use it and its benefits.
What Is Cash and Debt Management?
Cash and debt management is a process that people use to guide their financial planning and budgeting. This process involves planning your debt liabilities and payments. It helps you address various areas of your finances, including how you manage, save, borrow and protect money. This process aims to help you meet your financial goals, which may look like eliminating debt or saving for a specific milestone or life event.
To stay on top of your cash and debt management, you should track how much money you make and spend. While you may track how much you're paying toward your debt, it's also important to record your daily living expenses. When you know how and where you spend your money, you can choose to cut down on luxuries and purchases before making rash decisions.
Who Uses a Cash and Debt Management Plan?
Cash and debt management plans are ideal for anyone who needs to take control of their finances or wants a more complete picture of their financial situation. Some people need to control their debt, and others need clarity on how to save money for the future. If you identify with the following statements, then you can benefit from a debt management plan:
- Never have money left over at the end of the month
- Need to create a budget
- Need clarity on how much you spend on basic items such as food or clothing
- Need to save more money
- Spend more on your credit card than the amount you can pay off each month
- Have multiple high-interest, unsecured credit cards
- Are on the verge of maxing out all of your credit cards
- Avoid or delay paying your bills because you don't have enough money
- Constantly worry about money
- Fight with your spouse about money
- Don't know how everyone else saves money
This plan will help you look at your debt as a whole and develop a plan of action to move forward.
Why Use a Cash and Debt Management Plan?
There are several benefits to creating a savings plan. Mounting debt can put you in a tricky financial situation. When you accumulate savings and have a plan to reduce your debt, you can prepare for future emergencies and build your financial confidence.
Consider the following benefits when forming your cash and debt management plan:
Knowing you have enough cash in the month to cover necessities such as your rent and groceries is essential. It gives you peace of mind that your basic needs are taken care of. Building up savings and having a three- to six-month emergency fund will also reassure you if you're unable to work, get laid off or have a significant unexpected expense come up. It is okay to break this down into shorter term goals. To start out with, set your sights on saving the first $100 in your emergency fund. Once you’ve reached that, work on saving the next $100 and remember to celebrate your success along the way. You can also begin contributing to retirement savings, which will help you to feel more secure about your future. Generally speaking, the earlier you start saving for retirement, the more time your money will have to grow, which can result in substantially more money in your later years.
The opposite of financial security is financial instability. It is knowing you don't have enough money to meet your financial obligations. An example of financial instability is living paycheck to paycheck. If you're constantly weighing up which bills to pay first, you can benefit from drawing up a savings plan.
When you don't have cash on hand or savings, you're more likely to incur debt. Cutting down your expenses can help you have more money in your bank account to cover everything you need to buy, which can help you reduce your existing debt and the need to incur new debt. While you may not be able to reduce all types of financing like a mortgage loan immediately, you can decrease credit card debt and personal loans.
Making purchases from your checking or savings account instead of your credit card will save you money over time because you won't have to pay interest.
Improve Credit Score
While the amount of money you have in your savings account doesn't directly affect your credit score, it can ensure you have the funds you need in emergencies. Using your savings instead of your credit card in emergencies can keep you from forming large amounts of debt, leading to a better credit score.
Having financial confidence means you have the money to do the things you want — a savings plan can help you achieve this. When you have financial confidence, you can enjoy taking time off work when you want to, plan a vacation or even retire early thanks to the savings you've built up.
When to Use a Cash and Debt Management Plan
Answering the following questions can help you decide if mounting debt is a problem for you:
- Do you need to improve or create a savings cushion?
- Are you buying things with your credit card that you usually buy with cash?
- Are you nearing the limit of your credit card?
- Are you unsure about how much you owe?
- Can you make minimum payments on your credit card?
- If you lost your job, would you immediately be in financial trouble?
- Is increasing your monthly salary going to help you pay off debt?
If you answered yes to two or more of these questions, consider creating a debt management plan to take an in-depth look at your finances.
Sometimes, times get tough, and your spending goes off track. Creating a plan is the best way to get back to spending within your budget. The plan will help you track the money coming in and out of your accounts. When you have a clear picture of your spending, you can create a beneficial budget that allows you to save more.
How to Manage Spending
Creating a personal cash and debt management plan can be simple. By following these steps, you can start paying off your debt, saving money and enjoying financial freedom.
1. Assess Your Financial Situation
The first step is to take inventory of your financial situation to understand where to start. This includes reviewing all of your assets and liabilities. An asset is a resource with economic value that an individual owns. Liabilities, generally speaking, are something that is owed to somebody else.
Make a list of all of your assets, which may include:
- Checking account
- Savings account
- Money market account
- 401(k) plan
- Individual retirement account
- Health savings account
You may have other assets, such as cars and property, but the above are liquid, allowing you to tap into cash quickly. Next, make a list of your liabilities that may include:
Writing out your assets and liabilities will help you understand where you stand financially, especially if you're unsure how much money you owe or have in savings.
2. Set Your Savings Goals
You can set financial goals once you have a clear picture of your finances. Everyone has unique goals. Your goal may be to pay off significant debt, send your kids to college or retire early. Whatever your dreams may be, sit down and think about them. Envision where you want to see yourself in the next five or 10 years.
Life can be unpredictable, which stops people from planning out financial goals. Still, having goals is an essential first step in financial planning. If you need some inspiration to get started, consider the following:
- Start an emergency fund.
- Eliminate debt.
- Save for retirement.
- Buy a house.
- Go on your dream vacation.
- Be financially independent.
- Renovate your house.
When you know your goals, it's important to get specific. Setting actionable goals is essential to succeeding with your financial plan. Make sure to also separate them as short-term (less than three years), intermediate-term (three to five years) and long-term (over five years) goals. Prioritizing your goals is essential, too. For example, you may want to take your dream vacation but also have significant credit card debt. Paying off your debt before you go on holiday will put you in a better financial position. You can also add your goals to financial planning software available at many banks.
3. Decide How Much to Allocate to Your Goals
Once you know your goals, decide how much money you will allocate to each. When you commit to how much you'll spend on your goals, you can hold yourself accountable. If you have a monthly budget, you may already know how much you can afford to allocate. If you don't have a budget, it's important to create one so you know exactly how much room you have in your budget.
In both cases, it's worth examining your expenses to see where you can cut down. Making small sacrifices now will help you to plan for your future goals. When cutting down on expenses, focus on variable ones first — including gas, food, clothing and utilities. Then, you can look at your fixed expenses like mortgage, rent, car repayments, loan repayments and insurance. You have more control over your variable expenses and can easily make changes.
When planning how to allocate funds, think about how to build your plan, too. For many people, allocating funds around their pay period works best — this could be monthly, bi-weekly or weekly.
4. Examine Your Debt
If you have a large amount of debt, it's wise to tackle it to gain financial freedom. Consider these steps when you're assessing your debt:
- Create a spreadsheet: If you have several types of debt, creating a spreadsheet will help you to keep track. List your debt by name, the amount you owe, minimum repayment amounts, interest rate and the due date. In another area of the spreadsheet, list your income and subtract your expenses. You can dedicate what you have left over to paying off your debt.
- Manage your debt: You can either pay off your small debt first and move on to larger amounts or start with higher interest-rate debt. Starting small will help you build confidence, while paying off higher interest-rate debt will mean you owe less in the long run.
- Limit your expenses: The best thing you can do is stop spending on your credit cards. Make sure you refrain from applying for new credit cards or taking on any new debt.
- Track and monitor your debt: Keep track of your progress and monitor your credit score to see your progress. It will also help motivate you to keep going.
5. Choose Where to Keep Your Savings
When you build a savings plan, the account you choose will depend on how accessible you need your money to be. Some of your options include:
- Savings account/high yield savings account
- Certificate of Deposit
- Money market account
- Tax-advantaged account
- Taxable investment account
The savings account you choose will depend on your goal. If you're building up savings for emergencies, the money will have to be easily accessible. In contrast, a tax-advantaged account is better if you're saving for retirement. These accounts are a good fit for long-term savings because you can't take out the money before you turn 59 ½ without triggering an early withdrawal penalty.
6. Maximize Your Savings
Once you've planned where to put your savings, look for opportunities to maximize your money. For example, check your annual contributions if you contribute to a 401(k) at work. Could you contribute more to match your employer's full contribution?
You can also maximize your savings by putting in unexpected amounts like bonuses and tax refunds into your savings. That way, there is no temptation for you to spend it.
Once you have your plan in place, review it monthly to see your progress. Keeping track of your spending will also help you spot areas where you can cut down and save more money.
Save With First Commonwealth Bank
Creating a cash and debt management plan can help you eliminate debt and enjoy financial freedom. Reducing your debt and cutting down expenses doesn't have to be overwhelming. Setting goals and having an action plan to reach them gives you a clear direction on where you're heading, making it easier for you to take control of your finances.
At First Commonwealth Bank, we know your savings goals are as unique as you are, which is why we offer various tools like savings and money market accounts to help you reach your goals. Whether you need to get out of debt, save for retirement or accumulate an emergency fund, we're here to help. Start saving by contacting us today.