Learning how to manage your cash flow is essential to your financial success and it all starts with giving every dollar a purpose.
It is always so interesting to see people’s reactions when I tell them this. They think I am going to tell them to create an excel spreadsheet and track Every. Single. Dollar. Every. Single. Month. This is not the case at all. Once you learn how to give every dollar a purpose, your life opens up. It becomes simpler. Easier to manage.
So how do you do it?
Step 1: Figure Out Your Fixed Monthly Spend
To give every dollar a purpose, we first have to figure out what we spend. I always start with fixed expenses since we can’t change them very much. Think rent or mortgage, utilities (somewhat variable I know), insurances, minimum debt payments, etc. Then add them all up. This number is the amount of money you have going to ‘fixed living’. Every dollar here has a purpose centered around that.
Step 2: Figure Out Your Average Monthly Variable Living expenses
Next, we need to figure out how much money we spend on ‘variable living’ such as: going out, groceries, clothes, concerts, gifts, etc. Then add them all up. All of these dollars have a purpose and are going towards “variable living’ or ‘spending’. You can call it whatever you want. The key here is to figure out what your average monthly spend is and try to stay close to that every month. Some months you may spend an extra $200 on clothing but then spend $200 less on going out. It all averages out but it is important to try and keep the monthly spend number similar for planning purposes.
Also, in this part many people put in extra payments towards debt or savings, but you don’t need to. We just want to list the expenses you have since the goal of this is to figure out how to use extra dollars towards paying off debt, savings, and other goals.
Step 3: Figure out your net monthly income
To determine this number, go look at what dollar amount is transferred to your bank account every month. This can be harder if you are paid through commissions. If you are, figure out what you expect to make at a minimum each month and use that as your number for planning.
Step 4: Figure out your monthly surplus
To find your monthly surplus, use the equation:
Surplus = Net Monthly Income – Monthly Variable Living Expenses – Monthly Fixed Expenses
Let’s stay you make $7,000 post taxes and deductions. Then monthly fixed costs are $2,600 and your average monthly variable spend is $2,400.
$7,000 – $2,400 – $2,600 = $2,000
$2,000 is your monthly surplus. This is the extra dollars you have available to work on your goals and wants.
Most people leave this remaining money in their checking or savings and just count it as ‘savings’ and call it a day. While this strategy may work for some, there is a much better one. What you should do now is think about what goals you have. Maybe your goals are preparing for your children’s college, investing for retirement, traveling, and saving for a vacation house in the future. Now, with these goals in mind, you need to figure out how to break up this surplus of $2,000 so you can accomplish your goals (giving every dollar a purpose). Maybe $500 goes to a ROTH, $400 to travel fund, $400 to accounts for college, and the remaining $700 to a taxable account for flexibility (vacation house, college, etc). It’s important to break these up and attack multiple goals, but understand that you may have to prioritize 1 or 2 main goals if you don’t have the funds to accomplish all of them right now. This may take some reflection to determine what is most important.
The cool part about this is that you can automate all of it. You can create the right type of accounts that will let you automatically send the savings, investments, debt payments, etc. to the right accounts without even having to think about it. Then, your job is to go live your life and spend what is left in your checking account. It’s pretty simple once you have it on autopilot.
If you find budgeting helpful, you can budget and keep track of your spending, but over time you shouldn’t have to. Your goal is to live your life and spend what is sitting in your checking account. Just make sure you don’t put that account below $0.
Remember, the goal of money is to fund the life you want, not control it. This strategy allows you to do just that while prioritizing the things that matter most to you.
If you would like help automating your financial life so you can accomplish your goals, sign up here for an introductory first meeting to see if working with me would be a good fit for you and your family.