Does an unexpected car or home repair blow your monthly budget? Do you feel like you’re never able to save enough for a vacation? Do you worry about if you’re going to have enough for retirement but you don’t even know what you have?
If the answer is “yes” to any of these questions, you could benefit from a simpler way to manage cash flow.
I believe creating a budget and a solid cash flow management system is one of the most important concepts that today’s population needs to understand and use. Not only does it help create the framework around which money decisions should be made during one’s lifetime, it also creates the knowledge to help one adequately plan and prepare for the future—whether that be proactively planning for a short-term goal or, more commonly, planning for retirement.
Cash flow strategies and Finance 101 classes are generally not taught in today’s middle schools, high schools or even qualified higher education institutions (unless of course one happens to be majoring in finance or economics). Often, cash flow management is learned from those closest to us, which can be good or bad, depending on each unique situation.
We use what we like to call “bucketing strategies.” We’ve found a great deal of success in helping build cash flow systems that mimic a flow of money into several different categories or buckets. You can also help your children by teaching similar strategies to pave the way for successful money management skills during adulthood.
Consider the following bucket budgeting system:
Bucket 1 – The Primary Checking Account
This is the account from which all bills will be paid. When possible, set up automatic bill payments for all of the recurring monthly expenses such as mortgage or rent payments, cable, phone, insurance, utilities, etc. Generally speaking, most individuals know what these bills will be each month and therefore know how much cash should be reserved in this bucket to cover a full month worth of payments. Once this fixed dollar amount is set aside and reserved within this bucket, shift your remaining assets into additional buckets.
Bucket 2 – Add to Savings and Investments
Before paying yourself or making discretionary purchases, proactively set aside money for future goals. While we refer to this as “Bucket 2,” it may actually consist of several different buckets that are funded on an ongoing monthly basis, such as: IRAs, Roth IRAs, 529 plans, non-qualified accounts, emergency savings, etc. This means you’re saving for future goals before moving money into the discretionary spending bucket.
Bucket 3 – The Discretionary Spending Bucket
This can be a separate checking account or a cash system that individuals use for personal and/or household spending purposes. In my household, this is the golf, softball, travel and “don’t ask” bucket. It seems to work well for my wife and I since we know we’ve already set aside money for our ongoing lifestyle needs and savings for future goals. When we look at the money we have reserved in this bucket, we get to make individualized choices to spend money on things that make us both happy.
There’s no one-size-fits-all approach to cash flow management and budgeting. Every situation is different and a case can be made for using online budgeting tools or a personalized spreadsheet. The main variable that drives a successful system, is being proactive and honest about the objectives of the budgeting process.
For those who want more support, a financial advisor can help design a system that works for them and helps to plan for the future without necessarily giving up today’s enjoyment.