Everyone knows that establishing a household budget is a smart and important money management tactic. But many household budgets are shortsighted and only take a micro view of month-to-month income and expense figures. Gaining true control over household finances and getting the most out of your financial situation requires a broader view and consistent monitoring of what I like to call “Global Cash Flow.” When I use the term “global,” I’m not talking about the world’s cash flow, I’m talking your world’s cash flow – meaning your entire financial sphere. This broader approach goes beyond looking at set expenses, like your mortgage, car payments and monthly bills. I’m talking about constantly having your fingers on the pulse of your complete financial position and understanding it in the context of the surrounding economic environment. By maintaining awareness of your current and probable future income amounts, debts, investments, interest rates and expenses, you are poised to make proactive adjustments that can have a positive impact on your financial life.
Let me give you an example of why it’s important to monitor and understand your Global Cash Flow. Several years ago, when mortgage interest rates were lower, a lot of people locked in attractive low, fixed rates and secured nice low payments too. Things were good, so those same people could afford to take on more expense and accumulate additional debts. However, over time, property values dropped, inflation drove the cost of living up and those dents were not only adding up in number – they were also costing more due to increased interest rates. While everything was getting more expensive, for many people, wages were not keeping pace. Gradually (and sometimes not so gradually), what was a favorable household balance sheet had morphed into a financial scenario that was not very balanced at all.
The good news is that there are always intelligent choices you can make to rebalance your finances – but the main point here is that maintaining ongoing awareness of your situation and your options is a prerequisite for making effective financial adjustments. Ideally, a thorough and continuous macro view of your financial sphere will allow you to anticipate potential issues and opportunities and take a very proactive approach to managing your money. But even if you can’t always predict what’s coming, a consistent monitoring and reviewing strategy will enable you to identify problems early and take actions quickly.
One way to rebalance your income-expense ratio is to reorganize your debts. For example, as property values continue their upward trend, it may be worth your while to restructure your mortgage and leverage the equity in your home to consolidate and pay off other high interest debts. If you’re able to eliminate a bunch of high interest debts and possibly shorten the amortization of your loan, you’re probably going to be better off in the long run, even if you have to pay a slightly higher mortgage interest rate.
Interest rate tip: An interest rate is only the rate it is if it lasts the entire term of the loan. A lower rate does not equate to a lower overall cost.
Today’s technology has made it easier than ever to track, analyze and manage household finances. There are plenty online and smart phone apps that are designed to automate budgeting and expense management processes. By simply linking your accounts to the app, you can review comprehensive income and expenses by category and access your net worth instantly and in real time. Mint.com and the Personal Capital App are thorough, effective and user-friendly financial management tools – and both are FREE.
If you’re not comfortable using software applications, then get out some paper and start charting your financial numbers. Be sure to hold on to past charts so you can compare items over time and gain a historical perspective. Whatever tactics you employ to track and monitor your Global Cash Flow, be sure to consult with a trusted financial expert on a regular basis to discuss your options and get advice on the making smartest adjustments.
Patrick Stoy has 15 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.
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