Has logging into your online banking ever felt like back in your college days when grades came out and you were a little nervous to check? If so, then this article is for you. I am going to break down my cash flow management system that I have personally used and recommended to my clients for the last 12 years.
Before we get into that though, I want to level set by framing how I think about my money in the first place. When I think about money management, there are two vantage points you have to consider, the qualitative and the quantitative.
Quantitative is the fundamental and traditional framework for money management. Looking at every dollar that is coming in, and every dollar that is coming out and making sure that you have net-positive cash flow. From there, you now have the ability to allocate the surplus towards your financial goals. This is very straight forward, but if it were that simple, everyone would do it right? The way you get to an actual target that you can work with is by first, making educated guess on how your money is currently being allocated. Then, you go through the process of actually validating what you actually spend, from there, you set a realistic baseline for where you believe you can start that will stretch you, but not be so unrealistic that you don’t achieve it. This is known as the “stretch zone”. Once you have this number, this becomes your new target.
The next framework I use when managing my money, is the Qualitative framework. This vantage point factors things that are little less tangible or black and white. Some refer to it as value-based budgeting.
In order to make the most out of this framework, you have to ask yourself two questions; 1. Does this spending align with what I say I value? 2. Is there a more cost effective alternative? The main objective of this frame is not to get you to spend less, rather to ensure that how you are allocating your money is in alignment with what you say you value. The obvious revelation that you now should have is, am I clear on what I value? This should really become an eye opener for you and force some introspection on how you are allocating your financial resources to serve the highest version of yourself.
Once you’ve filtered your cash-flow through those two frameworks, you can now get into the tactics of how and where this money should be allocated. Here are the 5 accounts I recommend to manage your money effectively.
- Bill account (checking) – This account is for your past commitments. All fixed expenses like mortgage/rent, electricity car payment etc. Naturally your electricity bill could vary slightly from month to month, but by and large these are all expenses that you are expecting and should not be surprised about.
- Variable expenses (checking)– This account is for your present choices. All budgeted expenses that could vary such as groceries, dining out, gas, shopping etc. This is where the most area of opportunity can come or where the wheels can really fall off. By isolating the planned total for these expenses in one account, it keeps you honest because if you find yourself running out of money, that means you are not being true to the cash flow plan.
- Emergency fund – (savings) This is the “If I get laid off fund” or lose my primary source of income. You want to aim for 6 months- 1 years worth of living expenses. If you currently don’t have that, allocate a monthly recurring amount to be deposited in that account to build up to that number. Once you reach that number, you should taper off depositing into this account because you have reached your liquidity target and it would now make more sense to focus that excess cashflow on investing or other goals. You can adjust for inflation and increase account value by 2-5% a year.
- Major expense – (savings) This is an account that you can allocate a portion of your savings each month for planned larger expenses. This can include things like travel, furniture expensive electronics that exceed a normal shopping budget etc.”
- Emergency reserves (checking) – This is an account that you can use to allocate a portion of your savings for expenses that come up but aren’t monthly and the cost may not be he same every time. Such as vehicle maintenance, car registration, flat tire, insurance deductibles, and auto medical bills. Some may even choose to allocate things like your budget for Christmas to this account.
Bonus Tip: You should have a weekly money date to review your finances to see if you are on track or if you need to recalibrate. This will prevent you from getting to the end of the month and wondering what went wrong before you have a chance to course correct.
I hope you found this framework valuable and that is serves as a resource in your money management goals for the year!
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