Nothing is more important to our long-term financial health than aligning our spending habits with our income. There are only 2 things we can do with the money we earn - spend it or save/invest it for the future.

When we allow our spending to over-run our current income, we place restrictions on our future lifestyle. A cornerstone of financial health is understanding that our spending habits today will have future consequences - a few months or years from now.

Actions and consequences can not be disconnected. When we accumulate debts, we take from our future spending choices. The debt and the expense of carrying debt - interest charges - will be paid from future income.

Understanding the consequences of debt is even more important as we approach retirement. Carrying debt into retirement can have disastrous consequences for retirees, as they struggle to pay for past consumption in a new era of reduced income.

We must get serious about developing spending habits which balance our needs today, our need for income in our retirement years, and the reality of our current income.

One of the best solutions to the spending-saving dilemma is to prepare a cash flow analysis and then create a realistic budget.

The purpose of a Cash Flow Analysis is to show you the reality of:

• Your total income.
• Your total spending.
• How much each month you have to save or have overspent.
• How your overspending is enabled, where the extra money is coming from –
• Your debt is increasing, or
• Your savings are being consumed.

The purpose of a Budget is to help you:

• Plan your spending.
• Make provision for essential non-discretionary spending.
• Control discretionary spending.
• Pay off debt.
• Allocate money to savings and investments.

Action-steps:

• Prepare a Cash Flow Analysis.
• Prepare a Budget.

Also, review Chapters 3 and 5 in Investing for Retirement - Surviving a Financial Tsunami.