Not to over-simplify, but cash-flow management is crucial to the survival of any venture, whether it’s your household or a multinational corporation. You’ve got to take in more than you spend … otherwise the house of cards inevitably crumbles.—Ryan Holmes, CEO of Hootsuite
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Once you reach a level of income that meets your spending comfortably, it can be tempting to loosen the reins a bit and stop tracking your spending. However, understanding where your money goes day by day means fewer unpleasant surprises when big expenses occur, and a better chance of reaching your long-term financial goals.
Now that there are easy online tools to automate this process, there is no reason not to optimize your monthly cash flow. However, not every method works for every person, so we wanted to share a few ideas.
1. Spending Plan
We all know a “spending plan” is just a euphemism for a budget, and who wants to do that? Not so fast. The idea is not to scrimp and deprive yourself—it is to be aware of your spending, and make sure you are spending money where you intend.
The first step to a spending plan is tracking what you currently spend. You can do this through a variety of apps, Excel, or through something as simple as a pen and paper. If there are discrepancies between what you are spending and what you want to want to spend, the first step to changing that habit is knowing you are doing it in the first place.
You also want to make sure you A) have an appropriate level of cash reserves and B) that you are not raiding the cookie jar, or drawing down your savings reserves for everyday spending.
Ideally, your short-term savings reserves should be two to three times your core monthly expenses. If you see that account is dwindling after a month or two, then you have to recheck spending….it is likely higher than you thought! However, do make sure you have a healthy level of reserves to act as a financial buoy.
A few good questions to ask yourself as you create a spending plan:
- Am I paying for things or memberships I don’t use? This is the most common way money slips through the cracks.
- Is my spending adding to my net worth or detracting from my net worth?
- Am I contributing enough to savings and investments?
If you realized in the “tracking” step that your spending is out of line with what you really value, make a plan for change. No, this doesn’t mean never going out to eat again, or giving up your Starbucks habit cold turkey—it is about re-allocating your resources. For example, consider canceling memberships or subscriptions you rarely use, and allocate that “found money” to other financial goals.
The final step is sticking to your plan, and there are a number of ways to do this, as we describe below.
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Automating as much as possible in your financial life makes it easier to predict how much cash is available to you once savings and bills are taken care of each month. Put your bills on auto-pay, and also automate your saving to “pay yourself first.” A few more automation tricks:
- Have regular bills automated to a credit card with cashback rewards.
- Call companies to change your billing due date so that it coordinates with when you are paid each month.
- Set up an automatic transfer for big-ticket items automatically each month. For example, you can put money aside throughout the year for annual expenses like insurance premiums or holiday gifts.
3. If You Don’t Like Tracking Spending
Once you create a spending plan, you should have a couple of numbers in mind:
- How much to keep in checking
- How much to charge on the credit card each month
- How much should be in reserves (a good rule of thumb is one month of core expenses in checking, and two months of core expenses in savings for a total of three months of core expenses in reserves)
If you know you’re not the type to meticulously count every penny, automate to the extent possible, and for the rest, make regular check-ins with your online banking accounts or your bank’s mobile app if available. Make sure you are on track to spend and save the amount you intend to. It is ok to go a little bit above or below your target from month to month, but if you find yourself going off track for several months in a row, it’s time to go back to the spending plan. Figure out which categories of spending tend to be the culprit, and see if there is a way to make these expenses more automatic and less impulse-driven. For example, if you tend to over-spend at Starbucks, give yourself a refillable Starbucks giftcard each month so you can be more aware of the limit.
4. If You Do Like Tracking Spending
photo used under public domain
For some people, budgeting is actually kind of fun. It is a challenge to see if you can stick to your plan, and it brings a satisfying sense of achievement when you succeed. But paradoxically, you already need to be very organized with your money for this to work. If you aren’t the type to meticulously count your pennies, you are likely better off automating as much as possible, and knowing approximately how much should be in your accounts at any given time.
But if you do want to be very exact with your spending, the “envelope system” where you separate out your money for different purposes is decades old and still very popular. The idea is that you decide how much to put toward bills, groceries, and other categories of spending each month, and physically put cash in envelopes for each category. When the money is spent, it’s gone, so you either need to spend less in another area, or accept that you cannot spend any more in that category. It works. But in the age of apps and online banking you don’t need to use physical cash or envelopes. Some banks allow you to create “folders” in your savings account for different goals, and apps like Mvelopes and GoodBudget can sync with your accounts and give you automatic alerts when you are approaching your spending limit.
Another idea is to get a credit card specifically for discretionary costs. Do not use it for necessities like groceries, gas or kids’ needs—just dining out, drinks, or impulse buys. This can increase your awareness of this kind of spending, and creates a record of it in your monthly statement, which may motivate you to rein it in.
You have many options to create an efficient cash flow strategy, and at Halpern Financial, our team can perform a cash flow analysis for our clients whenever needed. We can help you to identify areas where you can be more efficient, and run projections to make sure your level of spending and saving can sustain your family for the long term.
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