Let’s play the word association game. What words are normally associated with summer? Here are a few:
air conditioner beach fruits
fun heat ice cream
independence day ocean park
recreation relax road trip
sand sea swimming
travel vacation watermelon
Did you see money in the table? No, of course not. What are in the table are activities, places and things that reflect how we normally would want to enjoy summer, with vacation as the number one thought bubble. And this vacation is currently timed with the two-month long school break of April and May in the Philippines.
But things are about to change. Generations from now, the words associated with summer may not be as common because of the change in the school calendar. A number of schools have already aligned their calendar with those of other schools abroad. Vacation time will now vary. Who knows, generations from now, the rainy season may be associated with vacation more than with summer.
What will not change is the fact that these activities, places and things that are currently associated with summer are part of what financial planners call discretionary cash outflows. Confusing as it may sound, the ideal is to optimize the amount of discretionary cash outflows in the family budget.
Financial planning says that for as long as a family’s finances are in order, a family that has a high level of discretionary cash outflows is one that is enjoying life more. The question is, “What is meant by having family finances in order?”
Well, other than discretionary cash outflows in the family budget, there are also non-discretionary cash outflows. The latter refers to outflows that cannot be foregone because they are needed for the daily operations of the family. Examples would be utilities, school tuition, transportation, food consumed at home and at work, clothing, medicines and the like. Monthly debt payments are also considered as non-discretionary cash outflows as borrowers cannot at will be granted, by creditors a moratorium on their debt payments simply because the former ran out of cash.
Invested savings that are essential for the future growth of the family are also part of the non-discretionary cash outflows. And the formula is:
cash inflows from revenues of the family minus non-discretionary cash outflows equal discretionary cash outflows.
So the more a family keeps its non-discretionary cash outflows low, the more it will have left to enjoy summer and life in general with discretionary spending. The danger lies herein as there is a great temptation to enjoy life first. And if finances are not kept in check, a family can end up having to borrow to enjoy life if it does not have enough cash left. Borrowings lead to a higher level of non-discretionary cash outflows for debt servicing, both in terms of principal and interest payments. And if cash inflow is not enough to pay for such debt servicing and other non-discretionary cash outflows, the family ends up borrowing again, with finances eventually spiraling out of control.
So while summer means fun, a family needs to ensure first that it has the funds. Such funds can be had if only the family would plan for them. If a family cannot keep its non-discretionary cash outflows prior to debt servicing low, the alternative is to invest savings, no matter how small. The end is to eventually grow income and afford the cash outflows that go with summer fun.
Remember, without having to resort to borrowing, only summer funds should lead to summer fun.
(Originally written by Efren Ll. Cruz, RFP at http://www.savingstips.com.ph)
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