Cash Flow Management: Spending, Saving, Sharing in 5 Steps
by David Strege CFP® CFA CKA® Senior Financial Planner |
May 2, 2023
Cash flow management involves developing a spending plan to tell your money where to go instead of wondering where it went. This is a key component of your financial plan whether you are younger and need to invest for your future or are retired and now need to keep spending within what your resources can support.
You can direct your income in one of three directions: Spending, Saving or Sharing.
Spending is what you use to pay for your lifestyle, including taxes and debts.
Saving is what you set aside to handle emergencies, short-term goals and invest for your long-term goals.
Sharing is what you desire to give to others or your charities of choice.
You get to decide what you allocate to each of these areas based on your personal philosophy. Developing a spending plan first requires knowing what you need each month for regular living expenses.
Step 1: Take time to review the last six months of expenditures in your bank account and credit card statements, and that should provide a verified amount of what you are spending regularly.
Step 2: Establish what you plan to spend for irregular expenses like property taxes, insurance, estimated taxes, gifts and vacations. You also need to plan to replenish your emergency fund as life happens.
Your long-term financial plan should provide you with the amounts needed to realize short-term and long-term goals. This can include paying down debt, building up your emergency fund, accumulating a down payment for a home purchase and retirement.
Step 3: Sharing can include assistance you are providing to others and charitable gifts. Determine your personal philosophy on how much you will give to nonprofits and work with your financial planner and tax preparer to see if this will lower income taxes for you.
Step 4: Once you’ve identified the amounts tied to each category (spending, saving, sharing) you are ready to establish a cash flow management structure to implement your plan.
First, have charitable gifts and investments made automatically. The sharing amount can go directly to charity from your checking account or to your donor advised fund from your income.
Next, have investment contributions auto deducted from your paycheck and sent to your company retirement plans such as a traditional 401(k) or Roth 401(k).
Third, ensure additional savings and investments - either short-term savings or long-term investments – are also being auto deducted from your bank accounts and deposited into other personal investment accounts.
Finally, the remainder is what you know you have the freedom to spend on established living expenses. You can have a savings account for other irregular expenses.
Step 5: If you struggle with using your credit card too much which causes you to exceed your spending plan, then withdrawl in cash what you plan to use for a category, like holiday gifts. Working with cash helps you see and feel what has been spent and how much is still available.
Financial success is relatively simple: Spend less than you make and invest the rest. I prefer to reverse that order by giving and investing first, then spending what is left. You can split the spending component into a few bank accounts, each with a designated purpose, i.e., vacations, gifts, home improvement and your emergency fund. This allows you to see the balance for each designated area and control your spending to what is available.
Developing a spending plan, implementing the plan, living by the plan and adjusting the plan over time will help you to realize your goals. Yes, it takes some time, effort and tenacity, but it will help prevent you from wondering where your money went.