It happens every paycheck. The cash hits your account (woo-hoo!) and maybe you buy a little something extra ‘cuz you’re flush. Then you decide which bills to pay and which ones you’re going to hold off until the next paycheck. Maybe you hold back some money because you’ve got a big rent payment due the end of the month. Regardless, life goes on and you buy groceries, gas up the vehicle, maybe do some date nights; all the while keeping a weather eye on the checking account. A credit card bill comes in asking for more cash than you’ve got on hand, so you work out how much you can pay on it (gonna go with just the minimum payment again?). Then you go on a witch-hunt to find out why the card balance is so high. The prime suspect is your life partner and the ensuing “conversation” is not relationship affirming.
The technical term for all that activity is “juggling.” “Circus act” also fits.
At best, you’re keeping your head above water, but more likely you’re sinking just a little lower every month.
Once you realize that you’re unsustainably treading water, you’ll probably try to do better. You may build a more elaborate budget and resolve to track every dollar. You may re-commit to exercising iron willpower and discipline. But in the end you’ll boldly go where everyone else has gone and find that administering a detailed budget is a ton of work and willpower is highly over-rated.
There’s a better way. But first I have to caution that if you’re in crisis due to crushing debt or simply not having enough income to cover basic expenses, then you’re going to be stuck with juggling your finances until you can work your way out of those situations.
But, if you have sufficient income to cover expenses and then some, then the best solution is not to manage your money more intensely, but rather to re-organize your cash flow to be easier to manage.
Start with your income. Think of it as a bucket (aka your checking account) that gets filled with cash when your paychecks come in and gets drained as you spend money. Paychecks can arrive on all sorts of schedules and in varying amounts – but that’s just noise. Save up enough to start the month with 100% of your standard monthly spending sitting in the account, right there on day 1. Then you can freely spend whatever you planned for the month with total confidence (more on that below) – you don’t have to keep watching the checking account balance. Meanwhile, new paychecks will arrive and refill the bucket for the next month.
Next, allocate all your standard monthly spending across 3 buckets:
- Fixed monthly bills;
- Savings and investment contributions; and
- Discretionary spending.
The fixed monthly bills are things like rent and subscriptions that get billed monthly and are roughly the same amount every month. Don’t include credit card payments unless you’re paying a standard amount every month to pay down a past balance. Also set aside money every month to save up for regular, but non-monthly expenses such as quarterly insurance payments or annual subscriptions.
For monthly savings contributions, set aside funds for large purchases (e.g., buying a car) and to cover unpredictable expenses such as car maintenance and medical expenses. You’ll also want to build an emergency fund to ride out income disruptions. Add all those up and come up with a standard amount to contribute to savings every month. Also determine how much you’re going to set aside for “retirement” and any other investment accounts you have.
Now you can apply some magic to those first 2 spending buckets: you can automate all the transactions because the money will be there. Automate the fixed bills by charging them to a credit or debit card – that’ll greatly minimize your bill paying work. Automate the savings and investment contributions by having funds directly deposited from your paycheck or set up automated transfers from your checking account. All this automation will ensure you execute on your good intentions.
Now whatever’s left over in your checking account after accounting for the first 2 buckets is yours to spend however you want each month. It’ll cover things like food, transportation, and entertainment. How you spend this money doesn’t matter (financially), so you can spend without guilt. Just be sure you don’t overspend the total amount or your whole monthly cash flow will get corrupted and you’ll have quite a mess to clean up. So keep track of your total discretionary spending. Here’s how:
- First, make a tentative discretionary budget using 5 or so categories. Don’t worry, this is just for planning purposes;
- Then for each category select your payment method – either cash or a credit/debit card. Paying with cash makes tracking easy because you can readily see how money you’ve got left. When you run out of cash, you stop spending in that category unless you take money from another category, which is perfectly OK.
- If you’re using a card, then use just one card. Then you can access the card balance online to see how you’re tracking for the month. Furthermore, you can connect the card to a free app like MINT to track spending by category.
After you’ve set that all up, all that’s left to do is to keep total discretionary spending on plan, do a monthly check to ensure that everything’s working OK, and pay off any credit cards you used. Paying off the cards should be no problem because all the expenses you put on the card were budgeted and all the money has been in the checking account since the first of the month.
The final part of the monthly process is to deal with any expenses covered by your savings account(s) – make sure you moved the required funds from savings to checking so they’re available when you have to make the payments.
OK, that’s a pretty quick run-through of the monthly cash flow system. Once it’s set up, it really cuts down the monthly juggling, administrivia, and drama; making it much easier to sustain. As a bonus, it’s a great system for being intentional in your spending and saving.