3 Cash Management Tips That Work

April 05, 2018

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:

  1. 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.
  2. 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
  3. 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.

Potential downsides

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!

The Amount We Spend On This One Thing Really Surprised Me

November 15, 2017

When it comes to planning your spending (sometimes called that nasty “budget” word), there are many ways to do it. I’m personally not one to track every penny or even allocate between shopping, dining out, travel or wine, but some people are. There’s no right or wrong way, just the way that works for you — diff’rent strokes for diff’rent folks.

While I don’t track specific categories of spending, I do like to be prepared for things that might come up that I can’t avoid, which is why I have a savings account labeled “car expenses” where I auto-deposit $25 per month — when something comes up with my car, whether it’s a dead battery, new tires or even just the annual oil change (I drive an older MINI Cooper, so it’s not cheap), I like to have the money set aside. What’s worse than having to cut back on wine because your stupid car broke down?

But a recent article that breaks down where paychecks tend to go caught my eye and has me considering adding a new auto-save category to my money. What caught my eye?

We spend an average of 8% of our income on healthcare.

Eight percent! If you had asked me what percentage of income I thought I was spending on healthcare, (not including fertility treatments), I probably would’ve guessed about 5%, which I would consider high due to the year I’ve had. (have I mentioned I hit my insurance out of pocket max in August?) But 8% really struck me — how many people are putting 8% into their 401k? If you’re not, I imagine it may be due to the fact that you feel you can’t afford it. But healthcare expenses are here and now — we can’t afford NOT to afford it.

So what to do with this revelation?

Planning ahead for the unknown

I’ve said before that the biggest budget breakers aren’t usually shopping sprees or vacations, although those can exacerbate the problem. What usually breaks budgets are random, one-time expenses that you really can’t predict. Or you can predict them, but you’re not sure exactly when they’ll strike, such as knowing your hot water heater is 13 years old, but for now it’s still steaming…

To get ahead of this, rather than trying to come up with the money to pay for healthcare expenses out of your spending money when they happen to pop up, just plan for them. Use the 8% guideline or find your own by adding up all your costs so far this year and dividing it by your income. Then set up a separate account just for healthcare expenses.

So if you make $60k, that’s $4,800, but keep in mind that the total includes any premiums, co-pays and even non-insurance covered stuff like acupuncture or therapy. If you have a Health Savings Account, make sure you are making full use of the tax-savings capabilities by running all eligible expenses through there. And if you happen to be reading this during open enrollment and use a Flexible Spending Account instead, make sure you’re not short-changing yourself by underestimating your expenses! It’s true that it’s ‘use it or lose it,’ but you can always stock up on band-aids, sunscreen and aspirin if you have some left over. (or try acupuncture!)

Want more helpful financial guidance, delivered every day? Sign up to receive the Financial Finesse Tip of the Day, written by financial planners who work with people like you every day. No sales pitch EVER (being unbiased is the foundation of what we do), just the best our awesome planners have to offer. Click here to join.