One of the most common things we talk to people about at Financial Finesse is deciding to take control of your spending. The most crucial step in making that happen is figuring out how to manage your cash flow. In order to take that commitment and turn it into habits that stick, you’ll need some strategies to help you along the way.
Let’s look at a few ideas that can help you master your cash flow – try one or two of them out to see what works best for you.
1. The Planned Spending Account system
The problem: Most people tend to have just two bank accounts – a checking account and a savings account. With the best of intentions each month, we often set a goal to transfer any money left over each month from our checking account to our savings account. But if you are anything like me, money in the checking account has a way of being spent, leaving little to nothing to move into savings at the end of the month. Even worse, too often money is transferred out of savings into checking because there always seems to be unexpected expenses not in the budget that come up. This cycle is frustrating and doesn’t get us closer to our goals.
If you’re one of those people who feels like every time you start to get ahead with savings, something else random always seems to pop up, then this method is for you.
How to fix it
Things like vacations, car repair/maintenance, clothing, and gifts are examples of expenses you know you will have through the year, but not necessarily every month. Since you know they are coming, these expenses are not emergencies. So why pull from your emergency savings to pay for them?
How do you set that money aside so it doesn’t get spent from your checking account or deplete your emergency savings account? The answer is adding a third account – the planned spending account.
Here’s how it works:
- Open a third bank account (preferably a savings account at a separate bank so it isn’t as easy to move money to your checking account) that is just for planned expenses that do not occur every month.
- Add up all needs that occur regularly but not monthly, like property taxes, car registration, hair cuts, etc. Also include less predictable wants like clothes, vacations, and gifts. Figure the total for planned spending for the year, divide that by 12, then deposit that amount into your planned spending account automatically each month. It really is that easy!
Planned Spending Category Annual Amount Monthly Estimate Car Insurance $1,800 $150 Clothing $800 $67 Vacation $900 $75 Gifts $600 $50 Medical expenses $2,000 $167 Home repairs $1,200 $100 TOTAL $7,300 $609
- Now when the Holidays come around or the car needs an oil change, how have the money set aside to pay those bills. No need to raid your emergency fund or pull out the credit card! This system may mean you move less into your savings each month, but you will see your savings grow because you won’t be making withdrawals either. This system is also great for helping you get out of debt and reaching your other financial goals.
Month Deposit Bills Expenses Balance January $609 Clothing $315 $294 February $609 Medical bill, home repair $390 $513 March $609 Car insurance, gifts $550 $572 April $609 Car repair $300 $881 May $609 Clothing, home repair $380 $1,110 June $609 Car insurance, medical $1,100 $619
2. The Cash Only system
The problem: Swiping a card makes it far too easy to spend-spend-spend, without really feeling how much is actually going out. Before we know it, we’ve blown our budget and may even have to “borrow” from savings to make ends meet.
How to fix it
One way to help control impulse spending is to commit to only spending cold, hard cash on these items. Commit to only using cash for all shopping during the week: grocery store, dining out, entertainment, etc. Resolve that when the cash is gone, you’ll be done spending and will go without for the rest of the week. Several of my colleagues use this method to great success.
Here’s how it works:
- It is ok to use checks, auto-pay or EFT for household expenses – no need to stuff an envelope with cash and send it to your landlord or mortgage company. This is for everything else.
- If you use the Planned Spending Account system described above, pay your irregular expenses from that account.
- For all other expenses that you haven’t accounted for in your Planned Spending Account, use your budget or spending plan to total your nonessential expenses for the month, then divide by 4.3 (number of weeks in the month) to determine how much is available for the week.
- Then either write a check for cash or go to the ATM on the same day each week to get your cash for the week.
- When you go out, leave the checkbook and credit cards at home.
- When the cash runs out, no more spending for the week.
Many of us think if we carry cash, we will be inclined to overspend. But if you stick with this system, you will most likely find that you’ll spend less. Think about how much more real it is to hand over six $20 bills at the grocery store rather than inserting your card into the chip reader — you’ll quickly find yourself re-thinking impulse buys.
You will want to make sure you are careful with your cash – one of the risks with using this system is lost cash and carrying a lot of cash can be dangerous. And while this system will help you avoid debt, you will lose out on credit card rewards and may make it harder to build your credit score. You’ll have to decide which is more important to you.
3. The Envelope system
The problem: Oftentimes an examination of past spending can lead to a realization that you have been spending a lot more on certain categories than you’d like. Trip to Target and Costco, anyone? But finding a way to stick to the new limits you set is the never-ending challenge.
How to fix it
This is an oldie-but-a-goodie! The idea is to take out enough cash each pay period to cover your budgeted expenses, then create an envelope for each category in your budget: Groceries, Entertainment, Dining Out, etc.
Here’s how it works
- On payday, head to the bank or ATM and take out enough cash to cover your budgeted spending until you’re paid again.
- Divide the cash into envelopes and label for each category.
- If a certain store is a weakness, give it its own envelope.
- When you go out to eat, take your Dining Out envelope with you and pay with that cash. Heading to the grocery store? Grab that envelope.
- Once that cash is gone, then you are done spending in that category until your next paycheck.
Note that it is ok to “borrow” from other categories if necessary, but no going to get more cash out of your account! You will have the most success if you stop spending once the envelope is empty.
If you like the idea of the envelope system, but are not crazy about carrying around cash and envelopes, there are also several apps that help with this same idea.
Worth it in the end
Whether your goal is to just stay on top of your spending, reduce your debt, prepare for the unexpected, save more for retirement or simply save for other financial goals, pairing your commitment to controlling your cash flow with these systems will help. If you find that one method isn’t working for you, try another — as long as you’re feeling more in control of where your money is going, it’s working!