A More Effective Way to Manage Your Cash

If you have ever tried to maintain a monthly budget, you know that it can be a daunting exercise that is difficult to maintain. While many people choose to create household budgets, I have found this method of cash management to be less than ideal for a few reasons:

  1. Budgeting doesn’t automate cash flow. Meaning it may provide powerful insights into your spending habits, but it doesn’t offer a process to streamline your monthly spending.
  2. Budgeting isn’t forward focused. It assumes past spending will be future spending, instead of focusing on your financial goals and effectively aligning your spending with your values.
  3. Budgeting doesn’t account for flux. It doesn’t adjust for unexpected changes in income or expenses.

Instead of budgeting, let’s manage our cash in a way that allows us to understand how our financial resources are being spent while simplifying and automating our financial lives. Rather than craft a monthly budget, I am going to detail a cash flow management system that offers insight and application so you can focus on your life rather than on your spending.

What is a cash flow system?

Put simply, it is an organizational system for your money that directs your income into the three primary spending categories so you are able to satisfy expenses, control spending, and plan for your future. When you look back at your last three to six months of spending, you will be able to easily identify which of your expenses fall into which category below:

Category 1: Static (Past spending)

Money that you have already committed to paying in the past falls within this category. This can be any debts like credit cards if they carry a balance, car payments, and mortgage. It also includes your ongoing fixed household operational costs that you can anticipate, like insurance or utilities.

Category 2: Control (Current spending)

Money to cover everyday purchases that tend to vary month to month and is a bit harder to monitor: groceries, gas, dining out, recreation, clothing, socializing, etc.

Category 3: Dynamic (Future spending)

Money that is designated for future wants and needs. This is money you will spend in the future and prepares you for expected and unexpected financial challenges and goals:  emergency fund, vacation, retirement savings, car repair, home improvements, and gifts.

Why a cash flow system works better than a budget

When you categorize your money into these three buckets, it prioritizes how your income is allocated. While a budget shows you what you intend to spend your money on, the cash flow system helps you make more informed decisions when it comes to directing your income that you can them automate.

How to put a cash flow system to work for you

  • Static expenses are always satisfied first, because you have already committed to paying for them. I recommend automating your static expenses so that every month your income goes toward paying these expenses first from your checking account by using bill pay services or automatic withdraws.
  • With what’s left, determine how much of your income will then go towards Controlled and Dynamic categories. Keep in mind, what you have in your Static bucket will affect how much you have left for current and future spending.
  • Money designated for controlled expenses can be deposited into separate family debit accounts for each member or provided in cash depending on your preference. This is money you and your family can spend freely on your daily expenses.
  • The income you want to put towards your future wants and needs can also be automatically transferred to accounts set up for savings. By setting up automatic transfers, you ensure that you are directing money to future goals and unexpected challenges.

With a systematic cash flow system in place, you’ll be able to better understand how your financial resources are being allocated, make better money decisions, more effectively understand and communicate your household finances, prepare for life events, clarify your priorities to achieve goals, and successfully automate your spending. You see, a cash flow system is a more effective way to manage your cash and limit the amount of time you spend thinking about anything other than how much you have to spend this week.