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Budgeting Basics- Introduction & Cash Flow
Introduction to Budgeting
One of the most important aspects of investing is cash-flow management, also known as budgeting. Not only is it necessary for successful investing, it is necessary for attaining most of the things you want in life. Here is an introduction about some budgeting basics.
A budget helps you focus on the important things in your life and how to pay for them. A good budget will help you economize and save for these things. It will also help you improve your risk tolerance.
What Is a Budget?
“You really need to make a budget and stick to it.” Hopefully, we haven’t lost you, because those 10 words have started more arguments and domestic disputes and have led to more divorces than any other words in the English language. There have been television sitcoms based on the premise that budgeting is just too funny and cannot be taken seriously. In fact, the financial planning community doesn’t like to use the term budget. Instead, they call it “cash-flow management.”
- If you handle money, you already have a budget.
- Budgets consist of cash coming in and cash going out.
Everyone Has A Budget
Everyone who handles money has a budget, whether they know it or not. It may not be written down, but it is there just the same. For example, mom gives her eight-year-old son a $10 allowance for the week. Does Sonny go out and spend it on a CD, candy, or school supplies, or does he save it to make a larger purchase in the future? It doesn’t matter how you answer the question. However Sonny “spends” the $10, he has made his decision based on his budget, although it wasn’t written down.
A budget has two main components: cash coming in (inflows) and cash going out (outflows). If you subtract the outflows from the inflows, the answer should always be zero. That’s called balancing the budget.
Budgets Compare Money Flowing In and Money Flowing Out
So why is budgeting subject to so much angst? Most persons don’t see the difference between income and inflows. Income is an inflow, but so is money taken from savings and money borrowed. Income is money earned from work, earned from investments, or received as a gift. Some people try to spend more income than they have, ultimately causing problems in the future, when the budget must be balanced with inflows from either savings or borrowing.
Here is a simple example:
Budget Example 1
The negative $3 cash flow tells us that to balance this budget, Sonny needs an additional inflow of $3. If Sonny had previously saved some money, then he could easily take the $3 from savings and his budget would look like this:
Budget Example 2
If Sonny didn’t have any savings, one of two things would happen: He would either have to postpone one of his purchases or he would have to borrow the cash from his mother or another lender.
Budgets Are Also Called “Cash-flow Management”
A budget is merely a way to identify cash coming in and how we spend it. It can be a valuable tool for planning future spending and for making investment and borrowing decisions. When used to make decisions about future spending, saving, and investments, it is called cash-flow management, essential to budgeting basics.
Protect Your Score
By Chris O’Shea*
How to maintain a good credit score during the coronavirus outbreak
Maintaining a good credit score can be stressful. Add something like the coronavirus to the mix and things get even harder. Don’t let this pandemic ruin that score that you worked so hard to obtain. Here are some tips for keeping that score high even as Covid-19 changes everything around us.
Check your Reports
Many financial institutions offer free unlimited credit report access.** If you don’t have access to your report through your financial institution the three major credit bureaus — Equifax, Experian and TransUnion — are all offering free, weekly credit reports for the next year. Just as before the coronavirus, check your credit report often. If there are any false claims, report them immediately through the bureau.
Reach Out
If you’re having trouble making timely payments (an important part of keeping a high score) contact the companies and ask for leniency. Many lenders and other companies are providing financial help to people negatively impacted by the virus.
Pay Debt if Possible
If you’re currently financially stable and carrying debt, pay it down right away. The reason? You don’t know what the future holds and the coronavirus makes things even more uncertain. Pay close attention to your debt now so that if things do take a turn for the worse, your debt will be manageable and your credit score will be in good standing.
* This guest article, Protect Your Score, is from the “Your Money Blog” in Mid Oregon’s online banking 
“Credit Savvy” resource. Protect Your Score is made possible by Savvy Money.
** Mid Oregon Credit Union offers free unlimited credit score access through our online banking “Credit Savvy” resource. Visit Mid Oregon’s Digital Banking Features page to learn more.
When Times Are Tough We Can Help
In tough times, it’s more important than ever to develop and maintain good financial habits. Having a household budget and shedding high-rate credit card debt are two obvious things that could benefit most consumers. But figuring out where to start can be a daunting task—especially if you feel like you’re already in trouble. The thing to remember is that it’s never too late to ask for help from your credit union. When times are tough we can help.
Manage your mortgage
If you have an adjustable rate mortgage (ARM) and are facing a rate adjustment, refinancing your home loan with Mid Oregon might be the break you need. Rates are very low today. If you qualify, you could:
• Refinance into a fixed-rate 30-year (or shorter-term) mortgage.
• Refinance into a new ARM that has terms better suited to your situation.
Even if you have a fixed-rate home loan, refinancing may free up some money you could use to:
• Pay down more expensive debt—credit card bills, for example.
• Build your emergency fund for unexpected expenses, such as car repairs or a new furnace.
Tap your home’s equity
A home equity line of credit can be a useful cushion if you’re not already overloaded with debt.
• You can set it up and never draw on it but have the comfort of knowing it’s there if needed.
• If you’re already tapped out, borrowing more is not the answer.
Cut credit card costs
Not all credit cards are created equal. Switch to a credit union credit card—they average more than two percentage points lower than bank credit card interest rates, and often have lower fees as well. For low-cost credit cards, we can help.
• Pay on time, no exceptions
• Whenever possible, pay the balance each month. When you have to stretch payments, pay in as few months as you can manage.
• Avoid cash advances—the interest rate on these is higher than on straight purchases.
Pass up payday loans
Payday lenders promise to help when you’re short on cash. You’ll get the money you need, but with interest rates from 300% to 1,000%. When times are tough, payday loans can make them tougher.
• See what it really costs to borrow from a payday lender, and
• Visit your credit union—we offer payday loan alternatives with fairer terms and lower interest rates, such as short-term signature loans and low-cost cash advances.
Use direct deposit
Direct deposit will help you to save automatically. You simply need to set it up to place a certain amount or a percentage into your checking account and another amount into your savings. With Mid Oregon’s state-of-the-art online banking, we can help you put your money where it will do you the most good. Direct Deposit gives you:
• One less thing to worry about; it’s the safest way to receive your money,
• An easier and more convenient way to contribute to IRAs (individual retirement accounts) and other savings vehicles, and
• More control over your money and your time—it’s predictable and dependable.
Steer clear of scams
Some scammers use negative economic news to scare investors into high-risk investments. They use investor fears to promote sketchy schemes with promises of high return and no risk that leave investors with nothing but empty wallets.
• Hang up on aggressive cold callers
• Delete unsolicited e-mails promoting investment opportunities.
Mid Oregon has an up-to-date resource to help protect you from scams and ID theft called Security & Fraud Center. Check back often to see the latest news and information.
As member-owned not-for-profit institutions, credit unions look out for their members’ best interests. Credit unions rates and fees can save their members hundreds of dollars annually. Don’t wait until you’re in deep trouble to ask for a financial checkup at your credit union. In fact, the earlier you ask for a review, the better the outcome can be.