Cash is the lifeblood of your finances. Without it, you would be hard-pressed to pay your debts, cover your living expenses and prepare for essential savings decisions.

With cash flows being a critical component of household finances and the primary path to securing financial independence, various surveys suggest that between half and three quarters of Americans don’t have a process for keeping track of their cash flows!

What’s more, the data show that about half of working Americans are living paycheck to paycheck, and about that same number can’t cover a $1,000 emergency expense.

Make no mistake, many of us are well aware of how essential staying on top of our cash flows from one month to the next is to maintaining financial health.

And while the rigor of sticking to a budget may not be for everyone, the truth is that you need to have some way to track and manage your cash flows if you want to increase your chances of securing your path to financial independence sooner rather than later.

Certainly, you’ve likely heard that a budget is useful in helping you keep your finances in order, but a cash management plan is also a vital component of a well-crafted financial plan.

Cash Flow Management vs. Budgeting

Now, it’s critical to make a key distinction between budgeting and cash flow management. A budget is an estimate of what you believe you will spend and save over a given period of time. Cash flow management, on the other hand, is the process of allocating your cash resources to spending and savings decisions.

So, what’s the difference between the two?

Well, a budget is a static measure of where your money ideally should go over a week, month, or year. Cash flow management, on the other hand, is a dynamic process that involves actively deciding where your money goes in real time. What’s essential to note here is that budgeting and cash flow management are not mutually exclusive. And the two often go hand-in-hand, with a budget providing a benchmark of where your money should go, and cash flow management is how you allocate your money accordingly.

Now, the trouble with cash flow management and budgeting is that what you should do is often tied to black-and-white logical thinking, while our emotions largely influence how we spend money. Indeed, many studies over the years have demonstrated a psychological connection between our money choices and our current emotional states.

And with cash being so important to getting the things we need throughout our life, staying on top of where your money is going is critical to achieving your goals. That’s because an inevitable emergency, like a furnace that needs replacing, the need for a new car, or a last-minute visit from out-of-town family members, can derail a budget. But a proper cash management plan can help you decide the best course of action when unexpected events arise.

Defining Your Cash Flow Management Strategy

That’s why when it comes to managing your money, focusing on your cash flow management process should likely take priority over your budget. Indeed, a well-defined cash flow management process should include a few critical components, including:

  • How often you review your financial accounts
  • Which financial accounts you need to check
  • The time and place that you’re reviewing your cash flows
  • Understanding your savings and spending decisions

What You Should Track

Now, at its most basic level, your cash management plan should give you an idea of how you spend your income from one pay period to the next. And while a casual glance at your bank account balance can be helpful, not understanding what that balance represents, especially if you anticipate further expenses or spending to come through in between pay periods, can quickly put you off track.

That’s why you should evaluate your cash flows, at the very least, on a weekly basis. For most individuals, this process can take just a few moments to less than 30 minutes per week. But the benefit of taking this step is immediately gaining peace of mind knowing where you stand financially.

Another step you can take to stay on track of your bank account balances is to take advantage of your financial institution’s text, email, and app alerts. Many financial institutions will send you daily updates on the available balances in your various bank accounts. Receiving these alerts can provide you a way of keeping track of changing balances from one day to the next without having to take the time to log into your accounts.

This approach is extremely useful should you see a sudden change in one of your daily cash balances, as it will allow you to get ahead of potential cash flow issues well in advance of them becoming a more significant problem down the road.

So with that said, which accounts should you keep track of?

Well, to begin, you’ll likely want to take a step back and determine your primary sources of spending. For example, ask yourself if most of your essential regular spending is flowing through your bank accounts or credit cards? If there’s a mix of cash and credit card spending that is paid off at the end of the month, what does that mix of spending look like?

While we’ll have more to say about the benefits and drawbacks of using credit cards to fund your daily spending decisions, for now, we’ll focus on your cash bank accounts. That’s because while credit spending can be a helpful stopgap in the near term, a shortfall in your cash accounts could have a cascade effect on your overall savings and spending decisions over the long term.

Remember, it’s the nickels and dimes that will get you.

So, as you log in to your bank accounts and look over your current transactions, your eyes likely will be drawn to large dollar transactions. While it’s vital to stay on top of total dollar spending, take a moment to review the frequency of spending, not just from day to day but also from vendor to vendor perspective. What you want to do here is get a feel for the trends to understand not just where you’re spending your money, but also how often you’re spending at those specific locations.

After a time evaluating your expenditures, you should have an intuitive sense of whether your spending trends from the past week are higher or lower than expected. For example, are you spending more than usual this past Wednesday compared to last week? If so, what changed? Was it that business trip or an unexpected visit from a friend or family member? Maybe work is stressing you out, and you needed to spend a little extra this week to compensate.

Whatever the case may be, look for trends in the frequency of your spending, and take some time to evaluate why you may have spent more money on a given day or with a particular vendor, and if so, understand what may have triggered those expenditures.

Finally, take some time to review your finances in a place that is conducive to the review. As we mentioned in a previous post, your environment plays a critical role in how you relate psychologically to the process of evaluating your finances.

Indeed, reviewing your money can be emotionally stressful because it may remind you of the sometimes less than ideal choices you may have made in the past.

That’s why priming your mind for a financial review is essential to getting a handle on your cash flows and to avoid becoming emotionally activated or emotionally shutting down altogether.

To do this, find a quiet time and place to complete your weekly cash flow management review. If you have children, ideally, this time could be in the early morning before they wake up or late in the evening after putting your kids to bed. 

Either way, align your positive ideation with the process of reviewing your finances. And if your stress related to your financial review is coming from a place of shame or guilt, your best course of action is to practice self-compassion and self-forgiveness before you begin reviewing your numbers.

And finally, stick to the process no matter how uncomfortable it might feel. While procrastination can give you a sense of bliss, you’ll likely find that the very act of simply looking at your accounts can immediately reduce your stress levels because now you know what you have to deal with, rather than worrying about what could potentially be waiting for you when you come back to it.

Spending within Your Means

So, now that you’ve prepared yourself to review your cash flows and understand what to look for from a transactional perspective, you need to give your review a purpose. And so, from this perspective, a key question you’ll likely need to answer here is whether you’re spending within your means.

Now, if you make a lot of money and are not sure where it all goes each month, then this approach will likely help you identify in short order where exactly your money is going. Put simply, ask yourself if your total expenses are less than your take-home pay each month?

Off hand, you will likely know whether this is the case if you find yourself dipping into savings or resorting to credit cards to supplement your spending on an ongoing basis. With that said, however, an ideal way to determine whether you’re consuming within your means is to tabulate your spending and compare it to your paycheck deposits.

You can accomplish this using a spreadsheet, tracking software, pen, and paper or mobile banking tools. The whole point is to group each line-item spending in categories to help better understand where your money is going.

Whatever your preferred tool to track your spending and savings might be, be sure to categorize each spending item consistently each month. This way, you can go back and accurately compare your consumption trends from one month to the next.

And, as you move forward with your spending and savings evaluation, ask yourself if your net consumption is positive, meaning that you spend less than you bring home each month.

If so, congratulations!

The next step here is to evaluate whether you’re leaving enough room to pay yourself and fund your savings goals. Now, if there’s not enough cash left over at the end of the month to build up that emergency reserve or fund your child’s 529 savings plan, now might be a good moment to take a step back and evaluate your spending categories for opportunities to reduce consumption or to increase your savings rate.

And if your net consumption is negative, meaning that you draw down on your savings account or use your credit cards to supplement your spending, take a few moments to evaluate which spending categories are taking up most of your cash flows. Here again, you’ll want to not just look at the absolute dollar values of expenditures, but you’ll also want to get a good idea of the frequency or how often you spend at a given vendor or in a particular lifestyle category for opportunities to free up cash flows.

Finally, now may be an excellent time to evaluate whether a budget might be a helpful means to managing your money. Now, make no mistake, sticking to a budget can be arduous, and as we pointed out before, it’s a static practice that in many ways does not reflect the dynamic nature of our lives. Even so, a budget is a valuable yardstick for evaluating how you’re spending and where it goes each month. 

And here’s the thing: there’s no right or wrong way to create a budget. Ultimately, your budget should act as guide to show you how your expenses and savings should net out to zero versus your cash inflows from one pay period to the next.

Know When It’s Time to Create a Budget

And, so, how do you know whether it’s time to create a budget for yourself? Well, here are a few ways to tell whether it’s time to create a budget.

First, if you find yourself struggling to make ends meet even when you’re bringing in a lot of money, then a household budget can help you identify areas where you might need to cut back on expenses or save more money. By tracking your spending, you can prioritize your needs over wants and ensure you’re putting money toward your financial goals.

Next, if you have you don’t have an emergency fund, then that might be your sign that it’s time to create a budget. Indeed, unexpected expenses can arise anytime, and so it’s essential to have a cushion to fall back on when you need that money. And so if you don’t have an emergency fund, a household budget can help you save money specifically for that purpose.

Another sign that it’s time to create a budget is when you’re overly reliant on credit cards. That’s because credit card debt can quickly spiral out of control, leading to higher interest charges and fees. And by creating a household budget, you can identify areas to reduce expenses and allocate more money away from credit and to pay off accumulated debt.

If you’re a high earner but don’t have enough money to contribute to your retirement plan, that might be another sign that it’s time to create a budget. Now, it’s never too early (or too late) to start planning for retirement. And a household budget can help you find ways to set aside more money for retirement and ensure you’re on track to meeting your financial goals.

Finally, if you have no idea where your money is going, then that might be your sign that you need a budget. If you need to figure out where your money is going each month, a household budget can help you identify areas where you may need to spend more wisely. And by creating a baseline against which to tracking your expenses, you can make informed decisions about allocating your money and working towards your financial goals.

Now, creating a household budget may seem like a daunting task, but it doesn’t have to be. There are numerous online tools and resources available that can help simplify the process. But remember, once you have a budget in place, it’s essential to stick to it. And, when an emergency arises, that’s when you can lean on your cash management process to help navigate life’s inevitable curveballs.

Tools to Create Your Budget

Well, so far, we’ve discussed how essential it is to track your expenses and why you may want to go about creating a budget. To be sure, a household budget can help you track your income and expenses, identify areas where you can save money, and set financial goals.

But, how should you go about setting a budget?

To begin, you’ll want to evaluate the critical components in your budget. You can start by identifying all sources of income, including salary, bonuses, investment income, or side hustles. Be sure to base your budget on your net income or the amount of money you take home after taxes.

Next, identify your fixed expenses. This is the spending that likely will remain consistent each month, such as rent or mortgage payments, car payments, insurance, and utilities.

Then, calculate your variable expenses. These are the costs that fluctuate each month, such as groceries, gas, entertainment, and dining out. These expenses can be more challenging to predict, but it’s crucial to have an estimate.

You’ll also want to factor in how much you should be saving each month. Indeed, your savings should reflect how much you’ll need to set aside for emergency savings, retirement, and other big-ticket purchases throughout the year.

And finally, don’t forget about your debt payments. Make a list of all the creditors you owe money to, then login to your financial institution’s website and identify your minimum payment due. Now, an important caveat here is that if you’re carrying a credit card balance, your minimum payment may fluctuate from one month to the next. That’s why it’s essential to monitor all of your financial accounts from one month to the next.

Now, as you build out your budget and consider where to allocate your income each pay period, think about it in terms of where your priorities lie. Start by separating out fixed costs from variable costs. Then, figure out how much money to allocate to each category by evaluating your spending over the past three months.

Budgeting Tools

Now, when it comes to actually creating your budget, there are a number of approaches you can take to establish a benchmark for your cash flows, savings and spending goals. However, the process of creating a spending plan can be overwhelming, especially if you’re not sure where to start.

Luckily, there are various methods available to help individuals create a spending plan, including the use of spreadsheets, software, mobile banking tools, and handwritten methods. So, let’s take a moment to review each of these approaches and their pros and cons.

Spreadsheets

To start, spreadsheets are an excellent tool for creating a spending plan. They’re flexible, customizable, and in many ways are easy to use. By creating a spreadsheet, you can develop a detailed plan that includes your income, expenses, and savings goals on one easy to use page. The added benefit of using a spreadsheet is that you can create formulas to calculate your spending and savings goals automatically.

Some other benefits of this approach include that they’re customizable to your specific financial situation, often easy to understand and can be accessed from any device with spreadsheet software.

Now, some of the drawbacks of using a spreadsheet is that it’s going to require manual input of the data, including categorization of spending and complex financial planning likely will require an advanced understanding of the software.

Budgeting Software

That’s why budgeting software is also a popular choice for some individuals who prefer an automated approach. These programs can categorize your spending automatically, create reports on the fly, and set reminders for upcoming payments.

They’re often web-based or installed on your computer. It also allows you to aggregate accounts from your various financial institutions and can be a great option for those who want a more comprehensive approach.

Now, some of the downsides of using budgeting software is that there are often costs associated with their use. While there are free apps out there, you often don’t know who created those apps or whether they’re vulnerable to data breaches. And finally, there’s often a learning curve involved that can be a major turnoff if you’re looking for a simple tool to create a basic budget.

Mobile Banking Tools

Another approach to creating a budget is using your bank’s online planning tools. Indeed, many financial institutions offer mobile banking tools that can also help you create a spending plan with just a few taps.

These tools allow you to track your spending in real time and see where your money is going, all from the convenience of your mobile phone. You can also set up alerts to notify you of upcoming payments or potential overdrafts.

And while these tools are useful, they may only provide limited functionality compared to other methods. For example, not all mobile banking tools allow for account aggregation, which could mean that you’d need to use one tool for each financial institution you bank with.

Handwritten Methods

Finally, some individuals prefer to create a spending plan using traditional handwritten methods, such as a pen and paper or a physical planner. This method can be helpful for those who prefer a more tactile approach and want to see their spending plan written down.

While this approach is useful, it may also be less organized than digital methods. Hand written planning also makes it more difficult to update or make changes to your spending plan given that it’s all a manual process.

Overall, however, it’s essential to note that various methods exist to create a spending plan, each with its own pros and cons. Either way, it’s vital to choose the method that best fits your personal style for evaluating your saving and spending decisions. Regardless of which method you choose, the most important thing is to stick to your spending plan, review it regularly and update it as your financial situation changes.

Avoiding Common Budgeting Setbacks

Now, as you go about preparing your budget, it’s critical to be prepared to deal with pitfalls common to the budgeting process. For example, it’s easy to overestimate your income, especially if you rely on bonuses or commissions. That’s why, if your income is inconsistent, be sure to base your budget on your lowest month of income to ensure that you can afford your expenses.

Another common setback is failing to account for all of your expenses from one pay period to the next. That’s why you should make sure you track every expense, no matter how small, to gain a clear understanding of where your money is going each month. Also, be mindful of those expense items that occur less frequently, like quarterly utility payments, semi-annual insurance or medical outlays, or annual tax, home or auto expenses.

And as your life circumstances change, you’ll want to ensure that your budget is adapting along with those changes as well. For example, if your expenses increase because you recently got married or had a child or your income decreases because your bonus or equity comp did not come through as expected, be sure to adjust your budget accordingly to avoid overspending.

And remember, simply creating a budget is not enough. While it’s ideal to track your spending weekly, at the very least, try to compare your spending and savings against your budget on a monthly basis to ensure that you’re hitting the mark.

Keep Your Mental Game Straight

Now, what if you’ve tried budgeting and it hasn’t worked for you in the past and what can you do if overspend or undersave? First, give yourself some grace and understand that you’re not alone.

To be sure, many individuals struggle with staying on track with their spending plans. And when this happens, it often leads to financial setbacks and feelings of frustration. Now, if you’re one of the many individuals who have tried to create a household budget in the past but have failed to stick to it, there are steps you can take to prepare yourself psychologically for financial setbacks, motivate yourself to get back on track, and avoid overspending.

To start, set realistic expectations. Setting unrealistic expectations is one of the most common reasons why budgets often failure. That’s because when creating a household budget, you might be tempted to set overly optimistic spending allocations with the hope that you’re finally on track to getting your financial house in order.

Inevitably, however, a larger-than-expected utility bill in the winter or a surprise tax bill in the spring could quickly derail your best-laid plans.

That’s why it’s essential to set goals that are attainable and realistic for your financial situation. And along these lines, you’ll likely need to acknowledge to yourself that building healthy financial habits takes time. Indeed, it’s crucial to be patient and understand that success may not happen overnight.

That’s why rewarding yourself for reaching financial goals can help motivate you to stick to your household budget. Small rewards, such as a night out at your favorite restaurant or a movie night, can provide the positive reinforcement you need to keep going, especially as you develop new money habits.

And, so, what should you do if you experience a financial setback?

Well, start by acknowledging your emotions. There’s no doubt that financial setbacks can be stressful and emotionally draining. That’s why it’s crucial to recognize these emotions and work to manage them effectively to avoid making impulsive financial decisions. And after a financial setback, take a moment to revisit your goals.

Indeed, revisiting your financial goals can be a powerful motivator. That’s why you’ll likely want to take time to remind yourself why you created your household budget in the first place and what you’re working towards. And as you’re working on establishing new money habits, find an accountability partner to help keep you on track. Indeed, sharing your financial goals and progress with a trusted friend or family member can provide you with the accountability you need to become the master of your financial independence journey.