Managing Your Cash Flow
Spend Plans and their evil cousin - Budgets - are not the most favorite topic for either Financial Planners or their Clients. In most cases, however, both Financial Planner and Client have to give monthly spending a good look as Client Income is typically the rocket fuel for Net Worth growth. There are some simple tips and even simpler tools you can use to assist in this effort.
Financial Planners provide many benefits. One of the benefits is in assisting Clients with their cash flow. This may sound trite as controlling spending is seemingly a simple endeavor - spend less than you make, how simple. In reality, however, executing this simple strategy, as we all know, is anything but easy.
Before getting to the technical parts, I will skip to one of the somewhat unquantifiable benefits of a Financial Planner - accountability. An American Society of Training and Development (ASTD) study found that if you simply tell someone else of a goal you have, you chances of achieving that goal are 65% greater than if you just keep it to yourself. Moreover, if you commit to a specific appointment - i.e. Date and Time - your odds improve to 95%. As a Financial Planner, I use this logic extensively when tackling cash flow with my Clients.
Know What you Earn
Before we can arrive at anything resembling a goal, we have to know the income streams. And by income streams, I mean net after-tax take home pay. As we are all well-aware, the top-line salary number is NOT the end result. We have to account for all sorts of money being taken out before a dime reaches our bank account. Here is an example of take-home pay for a Military O-5:
As you can see, the headline salary of $10,106 per month results in after-tax and after-savings take-home pay of "only" $6,692. Thus, for Budgeting purposes, it would be a serious mistake to plan on ten grand coming in when fully 30% less is actually going to hit your account. I would imagine most people are aware of this, so nothing truly ground-breaking here.
Try and Capture Your Expenses
Capturing expenses is a difficult task - one of the more difficult I have encountered in my work as a Financial Planner. The primary challenge is the utter ubiquity of our expenses. Moreover, some happen once per month, some happen once per quarter, while others only once per year. And looming above all those are the dreaded unexpected expenses. Collectively, this is a difficult set of facts to know.
Despite the obstacles, we still have to know our expenses, period. Winging your expenses ultimately leads to over-spending - the embarrassment of choice in our consumption society guarantees that. Here are some thoughts on how to categorize your outflows:
- Must-Pays: These are the monthly payments you "have" to make every month - think mortgages, car payments, utility bills, etc. These are comparatively easy to capture.
- Regulars: These are payments you have entered into for convenience. These are your NetFlix Subscriptions, Gym memberships, Music Streaming, etc. This category is subject to "expense creep". What starts out as an innocent $12 per month NetFlix commitment can quickly turn into several hundred dollars of automatically drafted monthly fees, some of which you may not even use.
- Irregulars: These are the one you know are coming, though it may not be this month or next. These are your vacations, activity fees for the kids, summer camps, etc. You know they are out there and you know they are going to hurt when you have to write the check.
However you do it, you have to get a grip on your inflows and outflows. Your future net worth depends on it - a full 70% of ending investment account balance is determined by the amount you save into the account. Meaning, you can obsess on asset allocation, active vs. passive, and advisory fees. However, if you overspend your income ALL other considerations will be rendered moot.
The Two Most important Numbers
When I work on Spending Management with Client, I begin with the end in mind and tell them that we are really trying to arrive at two numbers: A monthly savings amount and a monthly discretionary spend amount.
Everyone knows we have to save. Though even knowing this, largely speaking, most people are under-saved. Fully-stretched budgets to cover the life expenses I mentioned above only complicate things. However, it is important to keep in mind that we have to keep an eye on savings as our futures depend on it.
Probably the best tool that I've seen to encourage saving is to make it a monthly expense just like your mortgage or car payment. This strategy is otherwise known as "Paying Yourself First". If an employer-provided plan is the best you can do, so be it. In the saving game, something is absolutely better than nothing - it isn't even close.
If you take a look at the Earnings Statement before, the Thrift Savings Plan (TSP) savings allotment is listed as an expense. And even better, the amount is conveniently deducted from the Member's Paycheck, so she never sees it in her bank account. This is a strategy of which we should all take advantage.
The second number to arrive at is a discretionary spending amount. Simply put, if you work hard, you should be able to enjoy the fruits of your labor in a complete discretionary manner. And when I say discretionary, I mean on anything you want - you earned it, go enjoy it. And if you employ the savings as an expense strategy, you won't have to fret about splurging on your latte or avocado toast. I ALWAYS bake a discretionary spend line into any Client Spending Plan.
Some Useful Spending Management Tools
There is a vast array of tools for you to use to assist with your spending management. Some, like a simple spreadsheet, you can design yourself. Others are a bit more complex. Most tools require you to aggregate all your accounts for management and analysis. Setting things up can be a bit cumbersome, though it is pretty smooth sailing once you go through the set-up pain. Here are a few examples:
- Mint: This program is the standard against which all other budgeting tools are compared. Mint automatically tracks all your transactions and provides real-time updates for your perusal. Moreover, if you wish, you can customize the set-up to, for example, sub-divide an ATM withdrawal into multiple expenses paid for with the cash. If you want to start managing your spending with the help of technology, Mint is a great place to start, and even better, it's free.
- YNAB: You Need a Budget (YNAB) is a bit more in-depth than Mint and it addresses budgeting a little differently. You do a lot of work categorizing transactions with the intent of living off "last month's" pay. The idea is to smooth out your spending to the point that irregular expenses do not drive you to overspend your income. It's different, though for some, it works well. This software is not free, though the monthly expenses are not draconian.
- Tiller Money: Tiller is an account aggregator as well. It collates your spending and can automatically categorize transactions for you, which you can customize. I like to use Tiller with my Clients as the software allows very easy data-sharing, so I can customize the spending data in Excel using pivot tables and other data manipulation techniques. Tiller is not free either, though it too is very affordable, about $5 per month.
Some Suggestions on Controlling Your Spending
Here are some tips I use to try and control what money goes out the door:
1) Be judicious with subscriptions
Authorizing a vendor to charge you every month is remarkable easy to set-up. Conversely, it can be a real chore to shut down. Moreover, recurring charges can become so routine that you come to treat them the same as a car payment....they (the vendors) like it this way. I don't think there would be nearly as many NetFlix subscribers if we were required to stroke a check every month. I could be wrong, though I am pretty sure I am not.
In any case, I do recommend listing ALL your monthly subscriptions and culling a few. In all likelihood, you won't miss it.
2) Treat Food Delivery as a Rare Treat
Anyone who has ever used GrubHub, Uber Eats, or Door Dash knows the great simplicity of these platforms. And conveniently (for them), you need not bother inputting your credit card information - just hit the button and the food is on the way.
If you sit down and calculate your costs for this convenience, it is a huge premium. What was a $10 lunch can quickly turn into $25 when you include tipping...this is a serious increase in your expenses. For me, this is low-hanging budget fruit...don't do food delivery and your checking account is bound to "get swole".
3) Brown Bag Your Lunch When It Makes Sense
This strategy has made me tens of thousands of dollars over the years - I can't exactly quantify it, though I know it is true - and this doesn't count the compounding of those dollars.
The reason I cannot quantify it precisely some of the benefits are intangible. For example, when you bring your lunch, you needn't bother pondering where you will eat, no need to spend time transiting, and even better, you already know what's for lunch. This is very analogous to the Zuckerberg Hoodie or the Jobs Turtleneck...time savings. And with that time, you can do other budget and career-enhancing things.
4) Harness your yearly irregular expenses and save for them
Vacations, summer camps, activity fees and the like. You know they are coming, so don't be surprised by them. For a more detailed read on these, please read this.
The strategy here is relatively simple - list out your irregular expenses for the year and average them into your budget every month. Then, when the time comes, you will confidently know you can handle the costs without upsetting your budget.
5) Don't Buy a Brand New Car
Another piece of low-hanging fruit is your ride. I drive a 2003 car I inherited. It has 122,000 miles on it, runs great, and I have no intention of replacing it. And best of all, my car payment line on my budget reads zero. True, that line will eventually read a number greater than zero; however, I can push that reckoning well into the future. Whatever you decide for your vehicle solution, realize that cars are generally very well-made now and the used market offers numerous compelling purchases. Leasing? It can make sense, though it probably won't.
6) Do the Math on Your Home Purchase
I wrote previously about borrowing from your retirement funds to purchase a house. You can read all about that here.
As a follow-up, I will say that I get it about houses and why some folks are inclined to over-purchase. My suggestion when you are reconciling and rationalizing your purchase is to realize that some other part of your spending is going to have to be reduced to accommodate over-purchasing on your home.
7) Use Cash as Much as You Can
There can be no better indicator that you are out of spending money than having no cash in your wallet. Credit Card points be damned, using cash is an invaluable way to control your spending. For me, I use cash quite a bit, especially when I am purchasing indulgences like gourmet coffee, of which I am a frequent purchaser...I meant it when I said "discretionary".
For you, consider using cash as a way of both indulging yourself from time to time while keeping an absolute lid on the overall cost by only paying for those items in cash.
8) Gamify your spending
Gamification is all the rage now and for good reason. For an explanation of why, please read this. For fitness and diet assistance, new apps for the Apple Watch and iPhone are exceptional. Spending is another area where gamification can be a huge motivator. There are many apps that can assist in the effort. If you are interested, check-out Level Money, Qapital, or Smarty Pig.
At the end of the day, regardless of what technique or strategy you employ, you have to spend less than you make. That is the iron rule of personal finance. True, you can distort it from time-to-time and perhaps year-to-year. However, in the long-term for most of us, you have to spend less than you make to be financially independent. I hope the tools and techniques I mentioned here are helpful to you.
Comments, criticism, and suggestions are always welcome. If you would like to provide any or would like to discuss your personal situation with Resilient Asset Management, please contact us here.