Cash flow management and household budgeting
What the exam tests
Domain 3 examines household cash-flow statements, budgeting, liquidity and debt management. Questions ask you to calculate savings rates and ratios, spot structural deficits, and design a budget that funds goals without pretending the client can save more than income allows.
Core rules
- Use net (after-tax) income for household budgeting; separate fixed, variable and irregular expenses.
- Emergency reserve: typically 3–6 months of essential expenses, longer for variable income, single earners or dependants.
- Common lending guides: housing payment ≤ 28–36% of gross monthly income; total debt service ≤ 36–43%.
- Liquidity ratio = liquid assets ÷ monthly expenses; current ratio = liquid assets ÷ current liabilities.
- Budget methods include zero-based, envelope and 50/30/20 (needs/wants/savings); the method matters less than tracking and adjustment.
- Distinguish good debt (financing appreciating or income-producing assets) from consumer debt.
Worked example
Net monthly income is 20,000; essential expenses 12,000; debt payments 3,000; discretionary spending 2,000. Total outflows are 17,000, leaving 3,000, a savings rate of 15%. A three-month reserve is 36,000 and a six-month reserve 72,000. If liquid savings are 25,000, the client is below the three-month floor. The planner should direct the surplus first to the reserve, then to high-interest debt, then to goals, and should test whether the 2,000 discretionary can be reduced without pretending the 3,000 surplus is already saved.
Traps
Using gross income; annualising irregular costs incorrectly; counting credit limits as emergency funds; ignoring debt amortisation; proposing a budget with no contingency; treating all spending as equally cuttable.