My cash flow system is my alternative to traditional budgeting systems and was born out of necessity. In the spring of 1998, a career change opportunity was presented to me that had tremendous upside from my career at that time. However, the starting base salary was $20,000 lower than my salary at the time! It was the fall of 1998, when we started to really feel the drop in income and the bills were getting tight.
The Need For Peace of Mind
So I decided that I would put a certain amount of money aside each month in a separate account to make sure, no matter what the circumstances, that my important bills such as; real estate taxes, life insurance, and disability insurance premiums could be paid. I have stuck with and even expanded this system over the past 20 plus years.
Don’t Confuse My Cash Flow System With A Budgeting System
My cash flow system deals with comparing actual inflows and outflows of your money. I have found budgeting systems to be a waste of time. In a budgeting system you need to compare hypothetical spending with real spending and then spend countless hours reconciling the differences.
My Cash Flow System Actually Controls Your Spending
By limiting your spending to specific bank account balances, my cash flow system helps you control your spending within the month. Conversely, a budgeting system does not put hard stops on monthly spending. In a budgeting system it is only after the fact, when you do your budget vs. actual analysis, that you find out that you totally blew your budget!
My Cash Flow System Is Easy to Start and Follow
Recently, my son a daughter have become fully employed, and thanks to them following my system, they also have become financially disciplined. Like them, you can also adopt this system very easily and get on a path to financial discipline.
Here Is How My Cash Flow System Works
Let’s assume you are single, live on your own, make $60,000 a year, and are paid $2,500 twice a month. Here is how my system would work for you.
Gross Pay | $2,500 |
Step #1 – Maximize Pre-tax deductions (401k, FSA, & Commuting FSA) | ($250) |
Less payroll taxes, medical premiums, union dues, and other deductions | ($700) |
Net Pay directly deposited to your primary checking account | $1,550 |
Step #2 – Calculate your monthly recurring expenses of $1,900 | |
Step #3 – Establish, fund, & automate recurring expense account $1,900/2 | ($950) |
Amount remaining in your checking account for discretionary expenses | $600 |
Step #4 – Debit card, checks, Venmo, & cash for discretionary expenses | ($250) |
Step #5 -Credit Card used for discretionary items (paid next month) | ($300) |
Amount remaining in checking account rolled over to next month | $50 |
Reconcile, Adjust, and Repeat
After each month you will need to follow my monthly closing process to reconcile the actual cash flow for you bank accounts and credit cards. Once this is completed you can make adjustments to how in each of the steps above to better control your spending. Lastly, repeat this process each and every month and you will soon find yourself financially disciplined.