Broker Check

A Proactive Cash Flow System

April 03, 2020

In my last post, I covered the cash flow system that the overwhelming majority of people use to manage their finances. Over the years, I have seen that there are many issues that people encounter throughout their careers and lifetimes. In many cases, those problems go undiagnosed throughout a family’s earning career, only to become magnified once folks get closer to retirement.

One of the problems that exists, for example, is when a car loan gets paid off.  If you were paying $500 a month for that car loan, and that expense now falls off, in most cases that newfound $500 in free cash flow gets absorbed into lifestyle one way or another. Most people don’t proactively save that money.

Another thing that can arise over time is that when income increases, either from a raise, a bonus, or business interests paying dividends, because all of that income is going into that joint checking, or family checking account, your lifestyle starts to increase by the new found money that hits your checking account.  The reality is most people should start saving that new money while continuing to maintain their standard of living.

So, what I am going to review today is a proactive cash flow system. This is a system that if you implement, and if you are disciplined, it can change your life for the better. I use this system for my family, and all my clients use it for their families as well.

Think about money for a moment. If you have $100, what are the four things you can do with those dollars?

  • Spend it
  • Save it
  • Invest it
  • Give it away

That’s it. Those are really the only four things you can do with money, at least from a high level. And of those four actions, spending and giving fall into the “out-of-your-pocket” category while saving and investing fall into the “in-your-pocket” category. Money in or money out, it’s not any more difficult than that.

Let’s look at this; there are three specific buckets, each with a very specific purpose:

Up top, on the savings side, we want to have one account. This account is very important. This is the account where you want all your “household revenue AKA income” to go into. Set up your direct deposit to go into your separate checking/savings account at a different bank than the one you normally use. From that separate account, we then establish two automatic transfers out of that account each month.

When I think about it, it is kind of like a business and an employee. So, if you are an employee of a business,  you receive a paycheck or a salary.  We are simply treating your household like business, in that the business is generating and receiving all of that revenue up top, and you are just paying yourself and your family a salary, “lifestyle,” each month.  This is transfer number one.

How much money do you think your family “burns” through on a monthly basis to pay all of your expenses, and just live life? It’s probably higher than you think.  In fact, I just got an email as I am writing this from a client who went through this exercise and he said, “It feels good to finally have this sorted out…it was shocking to see! Especially how much my kids do, man they are expensive.”

That is the point of this exercise! YES! Most people go through life and have no idea what their “burn rate” actually is – not what your excel spreadsheet says it should be, but what it actually is. 

Most people look at it maybe every couple of months, or once or twice a year.  But most people don’t really have a good handle on that. Again, this is automatic transfer number 1 – setting up a monthly contribution from your separate bank account to your regular monthly expenses bank account.

Now, are there times of the year that are a little bit more expensive than others? Of course, think about the holidays. People tend to spend a little bit more money this time of year. In the summer, when it’s nice outside, people tend to take vacations, or spend a lot more time outside. So, we know there are going to be times of the year that are a little bit more expensive than others, and we need to prepare for them.

If I asked you, is it easier to find $1,200 for your Christmas gifts right after Thanksgiving, or find $100 per month for the next 12 months, what would you say?

Most people, I feel, would say it is easier to find $100 per month for 12 months.

So, if that’s the case, let’s go ahead and plan for it. As in my example, send $100 per month, or whatever your number is, to what I call is a Future Spend account.  It is a checking or savings account that we plan for spending those dollars at some point in the future.

This system looks very simple, and in reality, it is very simple.  When I share this system with families, I often hear, “Oh, we’re kind of doing something like that.” I kind of can bench press 300 lbs – no, I can’t! Kind of doing something isn’t doing something.

Try this system for 3 short months, that’s it. I’m very confident it will help change your life, and help you save more money than you ever thought possible, and you won’t do so at the sacrifice of your current lifestyle. If it doesn’t work, please tell me why it isn’t working. I want your feedback. Maybe there is something we can tweak to make it more efficient for your family.