Remember being a kid and thinking, “I can’t wait to grow up and do whatever I want?” Well, it’s safe to say if you’re reading this, you’ve arrived. Now you are the personal CEO of your own life. You get to call the shots. You decide what’s important, what happens next, when, in what order, and why. But, naturally, many of your decisions will be dependent upon available cash flow, which is why cash flow planning should really be at the heart of all the important decisions you make.
Want to take a vacation? Cash flow.
Replace the roof on your house? Cash flow.
Invest in real estate? Cash flow.
Fund your child’s 529? Cash flow.
Whether your goals include retiring early, buying a first (or second) home, starting a business, or funding your child’s education, you’ll need to get a firm grasp on your cash flow in order to accommodate for it all.
The problem is that too many individuals and families are just “winging it.” They have no idea how their money is being spent, if their spending is truly in line with what is important to them, or how they can switch things up to check all the boxes.
Before you run in the other direction, you should know this isn’t an article about cutting out your daily latte or $20 avocado toasts. It isn’t about pointing our finger and saying, “you can’t buy that.” This article is about managing your money in a way that allows for all of it. It’s about mindfully putting a system in place that makes room for the necessities you need to survive as well as the extras that make life a little sweeter.
Let’s start with the basics. This is a pretty simple exercise that will help you see where your money is going and at what rate. It also measures your expenditures against your income, so you identify your surplus or deficit.
- List all your monthly expenses by category, including debt payments.
- Break up non-monthly expenses into monthly amounts and place that amount into temporary savings. For example, this could include things like car insurance payments that are made every six months instead of monthly.
- Include a payment to yourself as an expense. Use that payment to pay off debt or build savings. This ensures you are working toward big picture goals before spending on things that you simply want in the moment.
Spoiler alert, there are a few more steps in this list, and the next one is:
- Reorder your list from step one with the highest priority expenses at the top.
But what does that mean? In priority of what “should be” important to you, or actually is? And this is where so many people go wrong. Don’t approach your cash flow plan as a prescription written to you by society on how you should be doing things to be healthy, wealthy, and wise. Think of it as writing your own story to make room for all the things that you don’t want to live without.
Cash Flow Planning is Personal
Cash flow planning is a very personal topic. What is important to some people isn’t going to be important to others. There are some things we all need, yes, like housing and food.
But that doesn’t mean that non-essential items aren’t important to us. If having nice nails is important to you and adds to your quality of life, then it will be a higher priority on your list of expenses for you than for others.
What’s more is that we tend to shift our expenditures as our priorities change. If you decide in a few months that having bright red hair is important to you and adds to your quality of life, even though it costs a lot to maintain, you will naturally shift your spending to accommodate for the red hair expenses that make you feel like a rockstar (even if it means not having fancy nails in exchange).
And there is zero judgement here. Only you know what makes you happy and enhances your well-being, so that will be what influences your cash flow.
This is all to say that (1) your cash flow doesn’t need to look like anyone else’s and (2) the way you order your list of priorities will shift over time. Cash flow planning is an ongoing exercise, not a one and done event. As your priorities shift, so too will your cash flow plan.
So as you approach number four, order your priorities from highest to lowest in subjective value. Then you’ll put it alongside your list from item #1 to be able to see where there might be values-based misalignment. That is, you’ll be able to see if you’re spending more on something that isn’t as important to you that you can reduce or eliminate altogether.
The idea is that you will reduce expenses on the categories that provide less value to you so you can spend more on the things that do.
- Now add up your expenses, starting from the top. Stop when the total goes over your monthly take-home pay and draw a line through the list there.
- Only pay for the expenses above the line. This will ensure you don’t break the cardinal rule of building wealth—spend less than you make.
- Try to cut down expenses above the line so you can include more of the expenses below it. For example, if you’re spending $700 a month on a rideshare service like Uber, this doesn’t mean you have to cut out Uber altogether. But perhaps you make different transportation decisions half of the time so you can free up $350 to spend on items that currently fall below the line.
Where Should I Be Spending My Money? By Percentage of Total Inflow
Even though the things on your list likely aren’t going to change, it’s nice to know where you stack up to general guidelines to identify if, perhaps, you’re spending too much in one area that could be remedied to improve your overall quality of life. Being house poor is a prime example. If you’re spending more than half of your income on housing, you might want to consider reducing that ratio to reallocate your funds.
Below are some pretty standard guidelines that you can use as a young professional in assessing your own cash flow.
Expenses Broken Down into Categories as Percentage of Total Monthly Income:
Now, these pieces of the cash flow pie are subject to change as you age or progress in your career. For example, once you get to your forties, you’ll likely hit a greater earning stride than in your thirties, so you may be able to increase your savings rate to accelerate progress toward your financial goals. In this case, your savings rate might be closer to 30% of your total income. Other events like paying off debt or having a child might skew these numbers, as well. But they give a nice range in which to work from as you identify a cash flow plan that works for you.
Being the CEO
Being the CEO of your own life is incredibly empowering. But what’s even more empowering than being the head decisionmaker is being able to make the decisions you want because your cash flow can accommodate it.
You see, the better managed your cash flow, the more freedom you have to spend your time and save, invest or spend your money the way you want to. But when things are out of control, you find yourself strapped to the limits of your income.
Improving your cash flow isn’t just a best practice financial exercise, it’s the key to getting and keeping all the things you really want now and in the future.
We hope you found this resource useful and are here to answer any questions you may have along the way. Happy cash flow planning!