June: the cash flow management post

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Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find April’s post here.

Here we are, halfway through the year already! It’s been a pretty interesting few months, and the next few promise to be similarly unpredictable. It's a great time to refocus on what you can control, like your spending. In prior months, we worked on centralizing your spending to gain insight into your habits and patterns. How much money will you have at the end of this month? How much will you have after six months? Now that you have enough data, let’s do something with it.

First, export the data to an Excel file. Once exported, sort the information so you can single out the irregular/non-monthly expenses, and set them aside.

Next, total up all of the regular spending and divide by the number of months. This will be your average monthly spending number. You will build your cash flow plan around this. For simplicity, we will assume that all the expenses will continue to be managed from one payment method (because now that you’ve done it for a while, you realize it really does make things clearer, right?)

Create a monthly projection that shows:

  • Opening bank account balance
  • Take-home income, according to your pay schedule
  • Expenses, as above and also include other items that weren’t captured (rent or mortgage, for example)
  • Transfers such as savings, 529, or investment account deposits
  • Debt payments
  • A reserve for the irregular expenses you identified above, so you can accurately anticipate them. You can either average them as with the monthly expenses above, or if there are a limited number, just add them to the relevant month

Project this out for at least a year. Apply increases or changes as appropriate (anticipated pay increases or bonuses, inflation). Now you have a pretty accurate snapshot of your finances over the next several months. 

Let’s look at what else is hidden in those numbers. How much savings is built into your current cash flow (both aftertax transfers and pretax contributions to retirement accounts)? Take a step back and look at the big picture. How much money do you have left at the end of the projection? Are you comfortable with the number?

If you want to change it, you have two options: spend less or earn more. To spend less, the likeliest target is the monthly all-inclusive spending amount, since that’s the one that includes your most discretionary spending. (You can also look to lower your housing expense, for example, but that’s going to be a tougher task). You can go back to the data you exported and create categories to help you lower your spending in a particular area, if you like. But since, as I say to everyone, a dollar’s a dollar, it doesn’t matter what you cut. An easier solution is simply to reduce that overall monthly amount. How low should it be? Low enough that you have to think about your spending.

This is how I manage my household finances. Here’s a secret: I almost never meet my spending goal. I’m almost always a little over. But just a little. That’s how I know it’s the right level: I need to keep an eye on spending in order to keep it under control and meet our saving and other goals. If it were too high, there wouldn’t be a need to keep spending in check (and in all honesty, we’d find something to spend the money on). If it were too low, it would be unrealistic and would mean that the projection isn’t accurate. So try to identify an amount that works for you in that way, and it's fine to do it in small steps: if you ultimately want to reduce your expenses by 20%, you can do it 5% at a time so it’s not such a shock (and that way, you’re more likely to stick with it). 

Don't be afraid to experiment: once you have it all in a usable format, you can create different scenarios (paying down debt quicker, increasing 401k contributions, taking a big vacation, picking up some side income) and get a sense of how the result makes you feel. Remember, the goal is to get into the habit of mindful, intentional spending. So now that you can predict the future, you can reshape it almost any way you like.