So how do we set up a painless cash flow system?
The first step is establishing a Control Account. This account will automatically receive all income, bonuses and gifts (from both spouses if you are married) through a direct deposit. A quick tally of that number will give you how much you cash work with. Be conservative. Don’t count on income sources that are not definite.
From there, I suggest you set up several spending and savings accounts. I like to use the same bank because it can facilitate transfers between the accounts. It’s important to watch out for fees here, so choose a relationship where you can get free or low-cost checking/savings options.
If possible, the next step is to go online and make sure those accounts are connected. Nickname the accounts if possible. You will label each of these accounts as to what the general category is for the expenses that will come out of it.
Example – Married Couple
I like to make sure that each spouse has a certain agreed upon amount that they can spend each month. This allows them to easily take care of personal items and services, clothes, gifts and can also serve as the source of funding for dinner’s out, etc… if one spouse typically pays for that.
Spouse A Spending Account
Spouse B Spending Account
They don’t have to be equal, just agreed upon based on your requirements.
Next, you will deal with your medium-term savings accounts. Some people group these together, but I find them motivating to separate out and designate. Some Examples:
Travel and Entertainment
Household Furniture and Repair (or down-payment fund)
Car Replacement Fund
Wedding Savings Fund
You will fund these each month with an amount equal to whatever will get you to your goal. $200 a month gets you a $2,400 vacation once a year. Simple. You will be very surprised when you find out that rather than saying, “I can’t afford that vacation,” you will start saying, “I can’t afford that vacation yet.” This is a huge turn of attitude that will bring a lot to your happiness by removing that feeling of being defeated.
Then, the not so fun stuff. The fixed expenses:
Mortgage and debt
Utilities (average them)
Insurance and Health Care
You know you must pay them. Get them into as many accounts as you need to. Some use just one account titled Fixed Expenses.
Document the rules for each account as to what you intend to spend from them.
Once you are done, you will hopefully have a bit of a cushion you leave in the control account each month. This is your emergency fund that is slowly growing. You should be shooting for 3-6 months of expenses and once you get there, transfer it to a less “accessible” money market fund. And forget about it.
All this work will create a 1 foot pile of mail, so don’t forget to set all your statements to paperless.
Here is what you will accomplish using this system:
You will remove the guilt of spending too much. This has been decided.
You will allow yourself a tool to accumulate more cash for things you really want.
Confusion between spouses needing personal items will be removed.
You will have a plan that involves little day to day accounting. You just need to review your balances.
It will remove the mystery in your head that tells you, “why are we always out of money, I don’t live extravagantly, don’t go on fancy vacations…” or whatever other internal conversation you are having. When you see it in black and white, you get it.
Conscious decisions. If you get a raise or a bonus, you both can get together and decide how to allocate it. A bonus, maybe you move into one of the savings accounts. A raise, maybe you reallocate more to a category each month. Or even add a category you couldn’t afford before.
I didn’t mention long term savings. Well, this should be one of your line items too, but you don’t need an account. This is the money that should be invested. Set up a systematic withdrawal from that control account to the place where you invest.
Good luck. I can tell you that people I know who have tried this – and stuck through it for a few-month micro adjustment period, were happier and less stressed.
Give it a try! If you have any questions, I am here to help you out.
Presented by Dan Romaine. The accompanying pages have been developed by an independent third party. Commonwealth Financial Network is not responsible for their content and does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.