Create a Cash Flow Plan
Creating a cash flow plan is the cornerstone of any sound financial plan. It not only enables smooth day-to-day functioning without the burden of financial uncertainty but also ensures living within our means, sufficient savings, and accurate retirement planning. Additionally, it plays a pivotal role in optimizing the right amount of insurance coverage.
To empower our clients with versatile tools that align with their lifestyles, we offer two distinct options for managing cash flows.
We firmly believe in the effectiveness of a "zero-based budget."
What exactly is a zero-based budget? It's straightforward: every dollar you earn is given a specific purpose, ensuring that the equation Net Dollars In – Net Dollars Assigned = $0. This intentional allocation of funds ensures a comprehensive and proactive approach to financial management, leaving no room for unaccounted dollars.
By employing a zero-based budget, individuals gain control over their financial resources, paving the way for informed decision-making and strategic planning. It encourages a conscious and deliberate allocation of funds, fostering financial stability and peace of mind.
In the subsequent sections, we will explore the two options we offer for managing cash flows, each tailored to provide effective tools while accommodating the unique preferences and needs of our clients. Whether through a detailed zero-based budget or another streamlined approach, our goal is to empower individuals to take charge of their finances and achieve long-term financial well-being.
Let's delve into Option 1, a detailed and comprehensive cash flow management system, ideal for individuals who are experienced and detail-oriented.
Option 1: A Detailed Approach
Step 1: Pay Yourself First
Begin by automating the allocation of funds for long-term savings, such as retirement, college savings, or other financial goals. This is done through direct debits from your paychecks or checking accounts, directing funds to accounts that facilitate optimal growth.
Step 2: Spending Management
After allocating funds to long-term savings, the remaining balance is directed to your checking account. We prefer spending primarily through a debit card, directly linked to your checking account. Utilizing just your checking account for spending encourages both self-regulation and simplicity. While credit cards are not entirely discouraged, the focus on spending directly from the checking account ensures consolidated tracking of income and expenses in one central location. This approach eliminates the need for managing multiple bills and prevents purchases when funds are unavailable. The simplicity, which is what we always strive for, outweighs the potential 1 to 2% cash back from credit card companies. Immediate expenses, occurring within a year, are managed and spent directly from the checking account, while funds earmarked for expenses beyond a year are kept in a savings account to earn interest.
Step 3: Building Spending Categories and Subcategories
Devote time to meticulously building spending categories and subcategories that encompass your entire year. A common pitfall in cash flow management is overlooking significant one-time annual or irregular events. For instance, allocating funds monthly to a Christmas category, starting in January, prepares for the inevitable holiday expenses in December. Every anticipated expense should have a designated category, ensuring a proactive and comprehensive approach to financial planning.
Click here for an excel sheet template for your use of a detailed, zero-based budget with spending categories and subcategories:
This approach ensures that every dollar is assigned a purpose, promoting financial discipline and foresight. The system allows for flexibility, with the money allocated rolling over each month within its designated category. This means that if certain expenses are lower than expected in a given month, the remaining funds carry over for future use, offering a buffer for unforeseen circumstances.
Management Tool Recommendation: YNAB - You Need a Budget
To effectively implement this cash flow management system, we recommend utilizing YNAB, a powerful budgeting tool available at www.ynab.com. YNAB seamlessly integrates with your financial accounts, offering a user-friendly interface and a range of features that enhance your financial management experience.
Key Features of YNAB:
1. Banking Information Aggregation: YNAB allows you to aggregate your banking information into a single, accessible platform, providing a comprehensive overview of your financial landscape.
2. Technical Support and Tutorial Resources: The platform offers excellent technical support to address any queries or concerns you may have. Additionally, tutorial videos are available to guide you through the various features and functionalities.
3. Multi-Budget Capability: YNAB stands out by enabling users to manage up to five budgets concurrently. This unique feature allows for individualized budgets, making it an excellent tool for families. Children can create and manage their own budgets, fostering financial awareness and responsibility from an early age.
Personal Testimonial:
My wife and I personally use YNAB and have found it to be a transformative tool in our financial journey. It serves as the centerpiece for our money discussions, ensuring that we stay on the same page regarding our financial goals and expenditures.
Having the YNAB app on our phones eliminates the need for impromptu discussions about available funds while shopping. This real-time visibility into our budget creates a sense of empowerment, allowing us to make guilt-free spending decisions. The philosophy we embrace is simple: if the money is allocated in the respective bucket within YNAB, we proceed with our purchase. YNAB has redefined the concept of a "budget" for us, turning it from a restrictive tool into a liberating guide for intentional and guilt-free financial choices.
In summary, YNAB not only complements the simplicity and discipline of Option 1 but also enhances the overall cash flow management experience. It serves as a valuable ally in achieving financial stability, fostering communication about money matters, and promoting a positive and proactive approach to spending.
Option 2: A Simpler Approach
Embarking on the journey of financial management can be daunting, but with the Simpler Automated Bucket System (Option 2), simplicity takes center stage. Tailored for those new to cash flow management, this system offers a user-friendly approach to gaining control over your finances.
Step 1: Prioritize Savings Automation:
The foundation of this system is built on the principle of paying yourself first. Automate your savings to ensure a consistent and disciplined approach to your financial goals. In this step, you direct funds for retirement, college, and other long-term savings to optimal and tax-efficient accounts directly from your paycheck.
Step 2: Create Purposeful Savings Buckets for the Large Irregular Expenditures:
Set up individual savings accounts for these large one-time expenditures that you know will occur, these include:
- Car Repair and Replacement
- Home Repair and Improvement
- Vacation
- Emergency Fund
- Christmas or significant gifting occasion
- Health Spending (for HSA users, save deductible "out-of-pocket expenses" here to allow tax-deferred growth in your HSA)
- Any other long-term expenses/goals (RV, Boat, Airplane, Rental Property Purchase, Land, etc.)
Once these savings accounts are established, automate how much is put into each account through direct deposit. This will ensure you have the cash available for those large purchases when the “unexpected” event occurs. When the time comes to replace your car, take that vacation, or cover Christmas expenses, just move the money from that savings bucket to your checking account and spend!
Step 3. Deposit Remaining Funds in Checking:
Whatever remains after allocating funds to specific savings buckets is deposited into your checking account for day-to-day expenses.
Step 4: Have Fun and Spend
Spend only the amount available in your checking account. Once the allocated funds are depleted, refrain from additional spending until the next pay cycle.
Conclusion:
The Simpler Automated Bucket System streamlines cash flow management, making it an ideal starting point for those new to financial planning. By prioritizing savings and setting aside money for the large one-time expenses that will occur, this system strikes a balance between simplicity and effectiveness. Remember, with this approach, once your checking account balance is spent, it's time to pause until the next influx of funds. This system provides a solid foundation for financial stability and encourages a mindful, intentional approach to your money.
As always, if you have any questions as to how this pertains to your situation, please contact us, we are more than glad to give you a helping hand.
