How to See into Your Financial Future
Positive cashflow, in business terms, is the net amount of money being transferred in and out of a business. A company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, meaning after they pay all of their bills each month, they have money left over to save or reinvest. Not surprisingly, your ability to build wealth is determined by the same principle.
When I found myself deeply in debt, I felt limited by traditional budgeting practices. Monthly budgets didn’t give me the vision I needed to manage my unpredictable income and future expenses. I wasn’t able to grasp the bigger picture of how money was flowing in and out of my life.
Cash would vacate my checking account from a variety of sources; debit card spending, checks, electronic banking transactions, and ATM withdrawals. There were large infrequent expenses like car insurance, car maintenance, and taxes. Also adding to the chaos were my credit card purchases.
After a few years of tracking my finances in notebooks, I yearned for a better way to visualize my cashflow in the future. If a business had software, bookkeepers and accountants to optimize their cashflow, why didn’t individuals like me have similar resources?
Sadly, I couldn’t find anything beyond variations of the old traditional monthly budget. Not even the most popular personal finance website in the world Mint.com – with over 20 million users – had my solution. Their only budgeting tool also focused on individual months (see example below).
Then one day it hit me, and the inspiration came from something simple. Have you ever used one of those calendars, the ones that allow you to see three or more months at a time? Like this one:
A multi-month calendar inspired me to develop my own way of projecting income and expenses into the future, a simple spreadsheet I call it my Quarterly Cashflow Planner.
It enables me to capture and visualize my entire financial universe beyond a single month by:
- Projecting every paycheck and source of income
- Breaking my expenses into categories
- Identifying what will be paid for in cash or credit.
- Tracking how my balance fluctuates based on my income and expenses.
In essence, it’s a live look of my finances.
Let me guess, you’re intimidated by spread sheets. Don’t be. And don’t get caught up thinking you have to use a spreadsheet at all. I’m terrible at excel, yet I cobbled together this crude but effective tool for my own use. The point here is to introduce the concept of budgeting beyond a single month and peer further into your financial future.
With the power of foresight in my arsenal I embarked on vastly simplifying my life. I began using credit cards to pay for as many expenses as possible. Turns out I was able to pay for everything but my mortgage and a few utilities. All of my food, shopping, auto, insurance and entertainment expenses could be purchased with credit.
Below is a typical month where my credit spending is projected in white, and whatever I have to pay in cash is projected in yellow. The total amount I anticipate spending on credit is tallied below in the red cell.
The far-right column – the most important feature of this tool – tracks my checking account balance relative to my earnings and spending.
How to Utilize Credit and Avoid Debt
Notice how the credit projections in white have no impact on my checking balance while the cash transactions in yellow do. Whatever I spend on credit gets paid the following month under the credit card category in cash (via an online banking transaction).
This is a key point, while monthly credit spending doesn’t immediately impact my cash balance, it is accounted for – and on my radar – the following month. This is how I remind myself of the pain of overspending on credit. Because if I spend too much, I immediately see how it negatively impacts my cash balance in future months. The ultimate goal is to avoid fees and interest and maximize my savings potential, so paying off my entire credit balance each month is the top priority.
I started rotating credit cards by due dates, using one with a due date on the first of the month, the other on the fifteenth (or middle) of every month. Since credit cards now captured most of my spending, and because they were due around my pay days, cash only left my checking account twice per month. This greatly simplified my life.
For most people, including me, the mortgage (or rent) is typically the largest expense. And it’s usually paid in cash because most banks (and landlords) don’t accept credit cards for payment – if they do there are usually fees involved – and I try to avoid fees. By having a choice of credit cards with two sets of due dates – each aligned with a paycheck – one towards the beginning of the month, and one towards the middle of the month, I’m able to juggle spending as needed to ensure I always have enough cashflow to pay my mortgage.
The best part about my cashflow planner is it allows me to spend much less time messing with my finances. I update it only when I get paid (which triggers me to pay bills) or if there’s a big unexpected expense.
Positive Cashflow vs. Negative Cashflow
The most valuable benefit to my cashflow planner is the column on the far-right, where I can see how my income influences my cash balance relative to when bills are due. Notice how my checking balance dips dangerously low in the first half of November. But I’m able to see it months in advance, giving me plenty of time to solve the issue.
Given this much notice, there are plenty of solutions to correct my potentially negative cashflow. I can transfer money from my savings into my checking, spend less in other categories, or reduce my savings to bridge the gap. And with each potential solution, I immediately see how it impacts my cashflow in the future. This is the vision and insight everyone should have to maximize their personal financial lives.
The beauty of quarterly cashflow budgeting is it allows me to see into the future, to see when I might enter into negative territory, it allows me to adjust and maneuver to avoid fees and interest. On the flip side, if I notice a consistent surplus of cash in my checking account, I can allocate more cashflow to savings or other investments.
Tracking What You Spend
I only use a few categories to track all of my spending. This is a personal preference; I’ve been doing it so long I know where everything fits. You may want to track more categories, please do whatever is comfortable, the most important thing is to see where you spend your take-home pay. For example, maybe you want to track how often you eat at restaurants or go to Starbucks. I just like the simplicity of lumping all dining, grocery shopping and beverages into the food category, for example.
It’s essential to learn how much of your income is going towards the major categories like transportation, food, housing and entertainment. This allows for accurate projecting, and even more important, you’ll begin to understand where your spending may be out of whack.
When I dug deeper into my own spending, there were three “entertainment” activities that drove me into debt: gambling, drinking, and golf – swallowing over 40% of my take home pay in some months.
I was living way beyond my means, and I knew it, but didn’t grasp the impact of it until I could SEE IT on my cashflow planner. I go deeper into how I track my financial life in the next post in this series, Spotting Trends and Reducing Overhead.