For many people, though, that advice just doesn’t resonate. They feel constricted by a budget. Keeping cash in separate envelopes makes them feel like they can’t have a life. It takes too much planning and too much rigid denial. They break their budget and sometimes wind up in severe financial trouble.
Others have an inconsistent cash flow, which makes creating and keeping a budget challenging. Maybe they’re freelancers who work gig-to-gig. Maybe they’re in commissioned sales. Maybe their hours fluctuate from month to month. Whatever the reason, it’s hard to make a detailed plan when your bottom line changes every month.
The answer isn’t to give up on budgeting. The wisdom we have all heard saying monitoring your expenses and income streams is the way to stability is still valid. It might just require a different approach to budgeting: cash flow focus.
Cash flow focus is the strategy used by most businesses. They pay their fixed costs, and whatever is left is used to grow the business. You can manage your finances the same way. Just follow these four steps:
Even if you disregard everything else in this article, implementing this one tip can be life-changing. Calculate how much of your income you can afford to save, then take that out as soon as you get paid. By setting up monthly transfers from your checking account to your savings account, your savings will be automatically funded with each paycheck. If necessary, you can also divide the money between your accounts. How you choose to do so, or the amount of money you can afford to put away each payday is less important than doing so. Follow the steps below for your USALLIANCE High Dividend Savings Account to set up recurring deposits from an external account.
As the saying goes, pay yourself first. These savings allow you the flexibility to cover significant expenses or make major purchases on your schedule. It's the single most important step in any budget, but even more critical with cash flow budgeting.
When you automate your savings, you remove the money you saved from consideration. You can't spend it; you've already spent it on savings. The importance of this kind of savings will become clear once you see this budget in action.
Make a list of your essential expenses each month. Include your living expenses (rent or house payment), your car loan, and your utilities. Also, include your student loan payments, your insurance, and other necessary expenses. These are your "fixed costs." They get paid after your savings contributions are made.
Next, make a list of your priorities. Include your charitable contributions, vacation savings, and retirement account contributions. These are your "growth expenses." They get paid after your fixed costs.
You can’t make a “better” budget if you don't have enough money to pay your growth expenses. You’ll need to lower those bills or increase your income. No amount of spreadsheet magic will change that bottom line.
It's helpful to automate savings for your expenses, too. That way, you never get caught short on your bills. Setting aside the funds you have pledged for your bills by transferring that money to a USALLIANCE MyLife Savings account or an HDSA account can be a helpful way to ensure you don't spend it.
This message may sound peculiar for personal finance advice. Remember, though, that you've already automated your savings. What you're spending here is the extra that's left at the end of the month.
Spend this money however you like! Don't worry about how much is going to entertainment or traveling. Just be sure to keep track of how much you've spent, so you don't accidentally overdraft your account.
This approach allows you to go out or indulge in a latte. You don't have to worry about including it in your budget. Your spending habits might change as the month goes on, just like a business. If you know there's a big outing or expense you want to splurge on before you get paid again, you may want to save some money for that. No need to say no because you didn't plan ahead.
If you've worked in a big business, you've seen departments desperately spending at the end of the fiscal year. Departments buy pens and paper cases, knowing they'll lose whatever they don't spend.
Fortunately, you're more flexible than a big business. You don't have to spend it all. If you have money left over at the end of the month, then you have more to spend the next month.
If you have a month with slightly higher expenses, you can cover it with a previous month's extra expenses. Your spending will change from month to month, as might your income. As long as you are not overspending, you can cover a higher month's expenses.
That's what cash flow budgeting is about: flexibility. You don't have to write your unbudgeted spending purposes in stone. You don't have to mess with cash envelopes or other strategies. You can spend when you have money and save for when you don't.
If you're considering adopting a cash flow budget, USALLIANCE Financial can help. You can automate your savings, flex your spending, and build toward financial security.
Reach out to our member services team at +1 (800) 431-2754 or memberservices@usalliance.org, where we can help you create a cash flow budget based on your needs!