Everything starts with cash flow. It’s time to get financially organized! Where do you even start? It’s the core of how you allocate your limited resources. Unfortunately, it’s an area I see many struggle.
A simple but often overlooked truth is that you shouldn’t expect to build wealth if you are consistently spending more than you make. That being said, you should expect to build wealth if you can rein in your spending habits and establish a working cash flow management system that allows you to prioritize every dollar you earn.
The Basic Framework
At the end of a past blog article: Why Budgeting Doesn't Need to Be a Dirty Word we started to talk about breaking down how you allocate your money into spending buckets. You can name these buckets anything you want, but fundamentally they all represent past, present, or future spending.
As a refresher, the three major spending categories or 'buckets' for managing your cash flow are as follows:
1. Fixed Spending. Past commitments that you need to pay back monthly. This can include your mortgage, car payments, credit card debt, as well as fixed household costs.
2. Variable Spending. Present day-to-day expenses like groceries, coffee, drinks, and gas. These tend to be a bit harder to monitor because there's so much variation in the amounts you spend each month.
3. Future Spending. The funds you want to use in the future. It can be money that protects you from unexpected financial challenges, allows you to fund our retirement, or for a shorter term goal like a home improvement or family trip.
Where Most Fall Down
Knowing how to allocate your money isn’t the same as actually doing so. The good news is that most households, with the help from apps like EveryDollar, Mint, and Pocket Expense, can understand how your finances fit into these buckets. The bad news is that while these tools allow you to better understand your past spending habits, they don’t do anything to change them.
I see most people struggle with their variable spending. Typically, most pay past commitments first and then spend their remaining income on variable expenses, leaving nothing for future needs.
How Do You Fix It?
In order to give yourself the best chance to maintain a successful cash flow management system, put these two controls in place to help keep variable spending in line:
1. Spend Only the Money You Have (Crazy Idea, Right?): All variable spending should be done from a debit card. I know people love points but ditch your credit card. If the money is not in the account, don’t spend it. Make the decision of whether you should or can buy something much easier by allowing your checking account to be your barometer. If the money is in the account, you can. If the money is not in the account, you don’t.
2. Automate (Weekly) How Much You Have Available for Variable Spending: Instead of trying to plan out expenses a month in advance like you do with your fixed spending, automatically fund your debit card via a transfer on a weekly basis, so you know every Monday morning you will have funds in the account. It’s much easier to plan for a week of eating and going out than it is to plan for an entire month.
The above will probably be tough at first, but stick with it. You will have weeks where you overspend, (and pull out the trusty credit card) but it’s a marathon not a sprint. Vigilance is the key. Experiment with the days you pay yourself and the amounts.
Effective money management is crucial to financial well-being and the accumulation of wealth. If you don’t have a system in place that lends itself to good habits you are likely to struggle getting ahead.
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