Cash flow is the life blood of a business and a household! Without a proper cash flow system, the use of your money is compromised and ineffective – you can end up spending more in interest, and less on what is really important to you. This is a system that you can adapt to your household and use your cash more effectively. Is this work – yes! Are happy and successful people reluctant to work – no! There is a cost to everything, even happiness.
Step 1 – Frame your mindset:
A cash flow plan is about making sure you spend your hard earned (and limited) money on what is important to you. Most of the things that are really important to you are not immediate – a vacation with your family, a concert you always wanted to experience, a piece of equipment for your table saw, your future financial security! So first decide what is really important and decide you will stop spending on the things that are not as important.
Step 2 – Understand your lifestyle costs:
One to 4 times a year, review your spending and prepare your budget. Take a look at your non-discretionary (fixed) and discretionary (wants) expenses and put them into a spreadsheet averaging them for the year and month. Knowing what you need in your chequing account to pay your lifestyle costs is critical. For a simple household budget spreadsheet download here.
Step 3 – Divide your costs into 3 main categories:
Savings (Pay yourself first) – monthly and annually
Non-discretionary and fixed costs – the minimum you need to live on – monthly and annually
Discretionary expenses – entertainment, vacation etc. – monthly and annually
A month is the perfect amount of time to plan around so know your monthly average even if expenses are paid annually or quarterly.
Step 4 – Set up your banking:
Chequing (joint) account – non-discretionary expenses – Income deposited here. Couples have the option of having their own chequing account but must transfer a pro-rated amount into a joint payment account.
Savings account – Arrange for automatic withdrawals to your savings accounts. Automatic means it will always get done, rain or shine and will not tempt you by remaining in account.
Discretionary joint account(s) – Arrange for a set amount to go to a joint vacation or entertainment account. This is where you save and pay for these periodic expenses.
Discretionary individual account – Arrange for a set amount to go to an individual discretionary account. This is your fun, day to day money. This puts a limit on it and sticking to that limit is easy because you only use a debit card for these expenses.
Credit card points cards were invented because they encourage spending so don’t let them suck you in. If you do use credit to pay for your expenses have two cards – non-discretionary (fixed costs) and discretionary (wants) and label your cards. You’ll then know which type of expense is being exceeded. I personally use debit for my discretionary costs.
You need some extra in each account so don’t budget too tight.
Automatic bill payment makes life that much easier. The risk of them making an error is worth the time savings of having your bills taken care of. Get on an email bill distribution service.
This system can be modified but the basics are important – separate accounts for savings, discretionary and non-discretionary accounts and automatic deposits and withdrawals.