The Simple Economist’s Guide To Cash Flow Planning

I think it would surprise most people how little time my family devotes to planning our spending. Most of our processes are currently automated and we really only discuss money during occasional unique situations. When we teach financial classes people often ask us about the specifics of how we manage our money. They want to know details about how we spend, budget, prioritize, and automate. The process seems daunting at first, but with a little bit of set-up, it almost runs on its own.

cash flowMany years ago we put together a little system and we have been using and tweaking it for years. At this point, we only spend a few minutes each month planning, talking, organizing, tracking, and thinking about our money. Almost everything is automatic. Saving, Giving, Investing, Tracking, and Planning are all done automatically. Setting up the simple system was really about thinking through three basic concepts: Prioritize, Automate, and Commit- then Repeat. That’s it. Money doesn’t have to be very complicated. We have simply chosen to organize our money so that it is in line with the important parts of our life.

What is important to you? Have you ever stopped to truly consider this simple question? Both in life, and in finance? This is the first step for any planning strategy but it is also the most overlooked. You must begin by understanding your priorities before you consider developing a full plan. I cannot emphasize this enough. The temptation is simply to skip this step or nitpick the details of a spouse/family member/friend’s spending without really understanding their priorities. Couples regularly gloss over the “prioritize discussion” but end up fighting about the symptoms of differing priorities rather than coming to an agreement on common goals. This is the first and most important step.

If you don’t have a plan for your money, it finds somewhere to spend itself. It can be pretty fun to spend the money we earn. But it is even more fun when we spend our money wisely and not wastefully. We may never feel like we earn quite enough to have or purchase everything we want. Even when our incomes rise, we tend to simply spend more. Therefore, it is important to sit down and determine what is actually important. If you are part of a couple, you must do this! If not, you are on your way to becoming a statistic of an unhappy or failed relationship. We must be honest with ourselves. If we are not, we will be much more likely to fail when we do develop a plan.

After working with lots of families and doing financial coaching over the years, I have noticed that most people skip this step. But, honestly, it is an imperative part of the cash flow planning process. But how do you clarify your desires? Some questions to help clarify your priorities:

  • Where do you want to be financially in 5,10 or 20 years?
  • How important is:
    College Funding?
  • What are your views on debt?
  • Are you willing to change? How much?
  • How much is too much time to spend at the office away from home?
  • How will you interact with your children about money?
  • What is (is not) working right now?

You can even use additional questions like: If I only had $1000, $3000, $10k a month to spend, how would you spend it? Or, What would I do if our income was cut in half? And finally, What would you do if you woke up with $5 Million and never had to work again? All of these questions are brainstorming ideas for getting started. You must clarify your spending priorities with yourself or family before proceeding. Automation, Budgeting, and Cash Flow Planning will all fail if you do not start with determining and agreeing on the important.

Automation is the key to consistency with our financial decisions. In fact, we have discussed at length the idea of automating the important. One of the reasons we chose a Capital One 360 account was due to the automation features built into the online banking software (and the no fee/high signup bonus). We all understand automation, but what do the nuts and bolts look like in our own lives? For our family it looks like this:

Payroll Deductions – Automated by employer – Health Insurance, Health Savings Account, Taxes, Disability Insurance, 401k Retirement Plan
Automatic Payments – Automated by Bank Account – Mortgage, Utilities, Internet
Giving – We also automate our charitable giving (we split our gifts into automatic transfers to our favorite organizations and also a discretionary giving fund).
Saving Accounts & Sinking Funds* – Life Insurance, Car Maintenance, Travel, Cell Phones, Gifts
Envelopes for Spending – Gas, Groceries, Entertainment, Blow Money

The plan is pretty simple. Every month we get paid, all the transactions happen automatically on the first of the month. All the bills are paid and cash taken from a local ATM for the few remaining categories. We still use a modern version of the envelope system. We call it our digital envelope system, but it basically puts our money into sub-divided accounts for easy tracking. We started with two basic forms to get the ball rolling: The Quicky Budget Form and Cash Flow Planning via Dave Ramsey. We started with those but ended up simplifying our needs into a simple GDocs/Excel form that looks like this (Click to Download):

Budget FormThis simple cash flow plan has allowed us to easily keep track of the money we spend every month from year to year. It only takes about 10 Minutes to update each month and everything else is automatic.

*Savings accounts and sinking funds are the key to removing budget busters from your cash flow plan. If you do not plan for inconsistent expenses they will hit you when you least expect them. You will be spending the money anyway, so you might as well plan for the expenses so when it comes you are prepared. Some examples would be: Annual/Bi-Annual Insurance Payments, Home Repairs, Vehicle Maintenance, and Christmas.  These irregular payments will continue to frustrate you if you do not think through them in advance.

Commit, Repeat
Very few couples or individuals can honestly make it through the prioritization phase. If you are single, you have an advantage when it comes to setting up priorities, but the commitment phase is more difficult. Couples have the distinct advantage (although sometimes painful) of having a built-in accountability partner.

Commit to the process before you commit to the specifics. Developing a plan is a great start but the cash flow planning process is not always easy. There will be unknowns and bumps in the road that will come. It is important to decide that the end goal is worth the effort. If you are just starting out, reading Total Money Makeover may help or even listen to DR’s free podcast. If you are further down the road, devour Mr. Money Mustache‘s articles and archives. Commit, Repeat.

Having a plan makes life easier and less stressful. Having a clear set of agreed upon priorities is the first and most important step to planning your life and financial picture. Once your goals and priorities are in place, automation is the key to consistency over time. Lastly, committing to the process is the only way long-term change will happen. Getting your cash flow planning correct will ensure you are financially successful. Take the time to do it right and your children and family will thank you later.

One thought on “The Simple Economist’s Guide To Cash Flow Planning

  1. What a good synopsis of a good system. You are absolutely right that determining priorities is the most essential first step. Those priorities then become the measure of success. Automation then reduces greatly the effort to get to that success. Good plan.