Understanding Your Cash Flow and Making a Budget Work For You

Imagine jumping into your car and starting to drive. You only brought your normal items with you – purse/wallet, cell phone, and keys. You have no idea where you are going, what you will see along the way, when you have arrived in the right place, or what you will be doing when you arrive. 

Now, imagine the exact opposite. You spent months planning a roadtrip across the country. You knew where you wanted to end up and then you went back and filled in the gaps. 

You researched the places you wanted to stop. You determined how long you wanted to spend in each location. You knew how long it would take to make it to the next destination. You looked up average temperatures when you will be visiting. You knew where you would sleep each night. You planned nearly everything, leaving room for adventure. 

Which would be more successful? 

The planned trip, of course. It is the same with your money.

Could a case be made for the original trip with no preparations? Sure, but probably only at certain times in your life under very specific circumstances. If you are here, that is probably not for you. 

I know if I was that way with money, it would take immeasurable amounts of luck to end up in a good place financially. Do you want to count on luck? 

I don’t. Planning and understanding your cash flow is necessary. 

If you do not plan where your money goes, you are driving in a car with no direction, leaving your time frame and destination to chance. 

Methods to Understand Cash Flow

Budget. It is a dreaded word for most people. 

While budgeting can be important, I personally do not like budgeting regularly. I like to do it during transition phases of life (first job, pay raises, buying a house, having children, retirement, etc.) and occasionally in between to see if I am content with where my money is going. 

How should you prepare a budget? However it works best for you! 

Below are a few ideas to get you started:

I personally like using a free Google Sheets budget template. I recently used this one. You can also search free Google Sheets budget template and see what others might work best for you.

I liked this one because it was simple and easy to navigate. By breaking it down by month, you can also take into account non-monthly expenses. For example, I pay my car insurance every six months, but not that I see it visually, I can break it down into what I need to save monthly. For example, if my car insurance is $600 every six month, I need to save $100 a month to not put a strain on my expenses in the six month. 

Pen and paper is tough for me. I love spreadsheets too much, but I know many people who prefer that method. 

YNAB is an interesting tool. What I like about it is that it forces you to assign every dollar to a purpose. If you overspend in one area, you can move funds from one category to another. For example, if you had an unexpected $200 auto expense, you could take $200 from your vacation budget. I like this approach because it forces you in advance to think about the finite number of dollars available and intentionally use them. 

Does it take some time to learn? Absolutely. 

Is it worth it? It depends. If you can get by on the spreadsheet, I would go with that method because it is simpler. 

However, if you would benefit from actively budgeting each month because you know yourself to be that type of person, YNAB seems like a good option. 

Again, budgeting is not easy. You need to be mindful and think through all expenses that pop up in a year, even non-recurring or recurring variable expenses, such as gifts, car maintenance, and home repairs. A general rule of thumb is that home maintenance expenses average about 1% of the home value each year. You likely will not need it each year, but you should be setting money aside each month to cover the expenses. If your home is worth $500,000, set aside $5,000 each year or about $417 per month. 

Make It Easy – Automate

Once you do a budget once, you can set up systems to make it automatic. Need to save for those home expenses? Setup a separate savings account or sub account and automatically transfer $417 into each month. Ally Bank has savings buckets. My local credit union has sub accounts that I label “Home Expenses.” Each month my paycheck hits my account, that set amount flows into the sub account each month. By making it automatic, I do not need to spend time on it each month or stress about where to find the money if an unexpected expense happens. 

You created your budget. Now what? Live with it until you want to change something or something in your life changes.

If you get a pay raise, adjust the budget, if needed. You can keep it the same though. Nothing says you have to spend more money.

Something I heard many years ago that I love is “spend 50% of each pay raise.” This helps avoid out of control lifestyle creep – where you end up adjusting your lifestyle and spending more as your income rises. You naturally get to spend more (50% more!), but you also are saving 50% more. 

Once the budget is created, set up a system to see if you are staying true to it. I personally have used Mint since 2014 for this purpose. You can link your financial accounts and it will automatically track your transactions going forward. 

You allocated $200 for restaurants each month. Is that what you spent last month? Mint will let you know. The really great thing is after a few years of history, you can see if you have lifestyle creep. From there, you can adjust and be more intentional with where your dollars go. If you are like me, my lifestyle creep shows up in food – groceries, restaurants, and Costco. So many Costco trips. Do they sell a bad product? I have not found one. 

Please keep in mind Mint, who is owned by Intuit, is “free”, which means you are the product. Nothing is free. If something is free, it almost always means you are the product. Hello, Facebook. I am okay with the fact that I am the product for Mint. 

Do they post a bunch of ads and encourage me to sign up for things I do not need? Yes, but I do not click on it. And as of this writing, they do not share my personal information with other companies. 

There are other companies, such as Tiller and Personal Capital, that also do budgeting. While I have never used Tiller, it appears to connect to your bank using Yodlee, an aggregator, and then automatically feed into Google Sheets. It appears to be a good alternative that has a low monthly cost. Personal Capital has budgeting features, but it’s primary focus is the investment platform. They may call you to pitch their investment services. 

When to Make Changes

After you have a system to automatically track your ongoing expenses, you may want to login the first few months and categorize anything that appears out of place. Sometimes your restaurant bill may be categorized under transportation. You can set certain expenses to auto categorize each month on Mint, which means next month it should track to the right category. 

From there, you can check it once or twice a year to track your progress. The only reason I would check it more frequently is if something major in my life changed. 

Did you get a pay raise? Time to adjust your savings rate. Remember the spend 50% more rule? Now it is time to implement it. 

Did you buy a house? Time to revisit the budget and closely monitor spending over the next year. It’s easy to increase spending with a home. 

Did you have a child? Throw out the budget. I am kidding – sort of. It is time to revisit the entire budget and think more about future goals. 

You can probably see making a budget and implementing a system to track your cash flow will not be done in an hour. Make time. Break it into chunks. Order a pizza and open a bottle of wine. Come back to it. Make it a part of your routine until it becomes a habit. Do what works best with your schedule, but do it. 

Without it, you are leaving your money to chance. Your goals are too important. You deserve to be intentional with your cash flow. 

After all, most of us would not jump in a car and start driving on a lifelong road trip. Good luck with your budget. 

Disclaimer: This article is for general information and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and other professionals to determine what may be appropriate for you. Opinions expressed are as of the date of publication, and such opinions are subject to change. Click for Full Disclaimer

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