Your personal cash flow is the movement of money into (income) and out of (expenses) your household. Your net cash flow is your income minus your expenses. When you have enough income to cover your expenses, you have a positive net cash flow. Your net cash flow is negative when you spend more than you receive.
Understanding how your household cash flows gives you the power to use your money to your best advantage. A simple tool for helping you manage your cash flow is a checking account. With all of your income flowing into, and all of your expenses flowing out of one checking account you have one place where you can monitor and exercise control over your cash flow.
In this article, it is assumed that you have a checking account that you use exclusively for managing your household finances.
“Making money” is typically something you will do for much of your life. The total income that you earn is your gross income. The money that you take home on payday is your net income: your gross income minus income taxes and any other deductions that may apply.
In this article, income refers to your net income, the money that you can spend any way you choose.
The outgo side of your household finances are expenses: how you choose to spend your money.
Your outgo includes cash purchases along with bill and credit card payments. Money that you set aside for sinking funds and savings is also considered outgo because the money is not available now: it has been put aside for use in the future.
When you pay for something with cash, you are using your spending money. “Cash” in this case could be actual paper and coins or some other money media such as a:
- check (that you write to draw from your checking account);
- debit card (looks like a credit card, but the money is withdrawn from your checking account);
- money order (a guaranteed payment you buy from places like Walmart or the Post Office);
- traveler’s checks (checks issued by your bank for predetermined amounts).
Spending money may seem like an unimportant part of your day-to-day finances; however, controlling your spending is very important because failure to control spending money is typically the main reason that people get in trouble with their finances.
Bills are financial obligations for the goods and services in your life on which you are required to make payments. Most of the bills you will have are predictable, such as:
- Rent or mortgage
- Utilities (electricity, water, garbage, sewer)
- Loans (auto, home, personal, etc.)
- Insurance (home, health, auto, etc.)
- Gym memberships
- Subscriptions (magazines, newspapers, Netflix, Amazon, Hulu, etc.)
There are also unpredictable bills. You may not know in advance when unpredictable bill payments will be due, how many payments there will be and/or how much the payments will be. Examples include:
- Medical/dental care
- Household services (plumbing, electrical)
- Veterinary services
Then there are the emergency expenses that are totally unexpected. These bills could require one payment in full. Such a large, due-on-receipt bill payment often translates to unexpected debt payments because you have to borrow the money to pay the bill.
- Repairs (auto, household, etc.)
- Urgent medical/dental care
A credit card is a line of credit: a pre-approved loan from the credit card company for a maximum amount of money. You use a credit card to pay for purchases by instantly borrowing the money, that you spend on the purchase, from your line of credit. You pay for whatever you bought by making monthly payments to the credit card company to repay the loan that you received when you made the purchase.
You use a sinking fund to save up money to pay for something at a future date. Examples could include:
- New tires for your car
- Christmas gifts
- Wedding expenses
- Plane tickets
- Birthday parties
- School books and supplies
- Clothes for a special occasion
- Home remodel
- Down payment on a car or house
The idea behind a sinking fund is to spread the cost of what you will be buying in the future over the income that you will be receiving between now and when the purchase will happen.
Saving is the process of setting aside part of your current income for future use. The amount that you set aside for a saving plan could be:
- a percent of an income – a percent of the money you will be receiving from an income;
- a fixed amount – the same amount in each income period;
- unscheduled – any extra money that is not needed for any other purpose.
The reason for saving your money can be anything. The intended use of a saving plan could be short-term or long-term.
A short-term savings plan is meant to accumulate money for an immediate need such as an emergency fund. The money in short-term savings is kept in your checking account for quick access. Earning interest on short-term savings (above what may accrue if your checking account is interest bearing) is normally not a concern.
Setting aside money in a long-term savings plan is how you reach a large future goal, like building wealth, as well as prepare for events, such as retirement. The money you set aside in a long-term savings plan is not kept in your checking account. Instead, you put your money in other types of accounts and investments that will allow your long-term savings to grow as quickly as possible.
There is no standard schedule for when paychecks are handed out. Paydays are scheduled for the benefit of the person or company writing the checks with no concern for how the persons receiving the checks will be affected financially. This can make planning your spending difficult when your plan is based on when you get more money. This is especially true when your household has multiple incomes each with their own payday schedules. It can be so difficult that most people don't even try to manage their money which often leads to financial trouble because of what typically happens each payday.
- Get paid.
- Pay bills.
- Make a payment on credit cards.
- Use what’s left for spending money.
- Use credit cards when spending money runs low.
This is what's known as living from paycheck to paycheck. It can be a downward financial spiral that leads to growing debt along with the stress that comes from the feeling that you have little or no control over your money.
On the other side of the model of household finances, the expense elements of your cash flow either do have a predictable schedule or can be scheduled as needed.
For budgeting purposes, paydays are unpredictable and, therefore, are not suitable as a basis for planning.
Each type of expense has, or can have a different, but predictable schedule.
The key to successfully managing your income is to give yourself a consistent amount of cash for spending money. When spending is not controlled, on each payday bills are paid first and what is left over becomes spending money. The amount of spending money each payday depends on the amount paid on bills. This can have you feeling like you are on a roller coaster with the availability of spending cash fluctuating between paydays. There can be lots of spending money one payday and barely enough to buy groceries the next. When money runs short, credit cards might have to be used to buy essentials.
When the amount and timing of your spending money is consistent, the impact on the money you have for paying bills and setting aside for savings is consistent which makes budgeting possible. In addition, if you have debt, the first step toward paying off your debt is to start controlling your spending money. Giving yourself a weekly allowance is the recommended way to do that.
With a weekly allowance, you are never more than six days from your next allowance which completely gets rid of the roller coaster effect with spending money that happens when living paycheck to paycheck. You give yourself the same amount of allowance on the same weekday each week regardless of when paydays happen. You do not plan on how you will spend your allowance, nor do you keep track of how you spent your allowance.
The goal for the amount of your allowance is to have little or no spending money left at the end of each allowance week.
Bill payments, with rare exception, are scheduled on some form of a monthly schedule. Changes to payment due dates are typically the result of a due date falling on either a weekend or holiday. When that happens, the due date might be moved to either the following or the preceding workday.
Bill payment due dates are typically scheduled on the same day:
- Each month
- Quarterly (each third month)
- Semi-annually (each sixth month)
- Annually (each twelfth month)
- Multi-yearly (in the same month every so many years)
There are two monthly days associated with credit cards: the statement closing day and the payment due day. There is typically a twenty-five-day grace period between the day a credit card statement is closed and when the resulting payment is due.
The monthly payment day never varies. Statement closing days, however, could be sooner in a month than the normal closing day. For example, a credit card account closes on the 19th with a payment due the following month on the 15th. Each payment will always be due on the 15th, but statements could close on or several days before the 19th.
A credit card account closing day being earlier than normal in a month is typically because the normal closing day happens to fall on a weekend or holiday.
Setting aside money for a sinking fund happens on a schedule that you choose. The amount to be set aside during each income period between now and when the money is needed is consistent: the goal amount divided by the number of income periods. When each set aside to a sinking fund happens can be in sync with the payment of monthly bill and credit card payments. This makes setting aside money for sinking funds an integral part of paying bills.
When money is set aside for savings depends on the type of saving plan and how the set aside amount is calculated.
- For a percent of a predictable income, the set aside happens each time a deposit from the income is recorded.
- For a fixed amount saving, the same amount is set aside on a schedule you choose. When each set aside to a fixed amount saving happens can be in sync with the payment of monthly bill and credit card payments. This makes setting aside money for a fixed amount saving an integral part of paying bills.
- For an unscheduled saving, money is set aside when you have extra cash that is not needed for any other purpose.
Deposits to long-term saving or investment accounts are scheduled as bill payments. Each saving payment schedule and amount may be either at your discretion or on a schedule and in an amount required by the investment company.
A personal monthly budgeting framework can be created by taking advantage of the predictability of expenses while ignoring when paydays happen.
Paychecks are money. Paydays are events. The money you receive is important, but, when you receive it is not. Therefore, to remove their disruptive influence on financial planning, you can ignore paydays.
When a paycheck is received, preferably via direct deposit to your checking account, the amount of the paycheck is deposited in full. All you do is record the deposit. Nothing else happens on paydays.
Your checking account becomes a cash reservoir that separates unpredictable income from predictable expenses. The money in your checking account can be used on a schedule that is independent of your paydays.
The fundamental schedule for expenses, both commercial and personal, is monthly. Having a budget for household finances that is monthly based puts your financial planning in sync with the businesses that you deal with.
There are two aspects to giving yourself an allowance.
1. Getting your allowance from your checking account each week.
2. Setting aside the money in your checking account for your allowance for each coming month.
You schedule the weekly part by picking which weekday you choose to get your allowance. This leaves the monthly part to be scheduled as part of your budget. When each set aside for your future allowance happens can be in sync with the payment of monthly bill and credit card payments. This makes setting aside money for your allowance an integral part of paying bills.
With payday no longer being when you pay bills, you are free to make your bill and credit card payments on a monthly schedule that matches when those payments are due.
Paying bills once a month is too infrequent. Paying bills weekly is also inappropriate since weeks and months do not normally start on the same day. In addition, the number of weeks in each month is not consistent. The best compromise is paying your bills twice a month on the 1st and 15th.
- On the 1st you pay bills and credit card payments that are due on the 1st through the 14th.
- On the 15th you pay bills and credit card payments that are due on the 15th through the end of the month.
With your checking account acting as a cash reservoir, the bill and credit card payments that you make on the 1st and 15th are paid with money that is already in your checking account. You will no longer be faced with having to wait for next payday in order to pay a bill.
To simplify the planning for and the setting aside of money into your sinking funds and short-term savings, schedule these set-asides on the 1st and/or 15th of each month. Saving your money then becomes an integral part of paying your bills.
The monthly budgeting framework sounds good. It takes into consideration all aspects of your household finances. However, manually creating a spreadsheet that takes into consideration all aspects of the model of household finances would be difficult. Maintaining that spreadsheet month to month would be frustrating and require hours and hours similar to traditional monthly and payday budgeting. That's why a program was developed to handle all of the inter-related mechanics of planning and using your household finances.
A Real Budget uses your description of your financial elements (income, allowance, bills, credit cards, sinking funds and savings) to build and maintain a spreadsheet that includes all aspects of your household finances. The program handles all the details so that you can focus on planning and keeping up with the inevitable day-to-day changes to your cash flow.
When you use A Real Budget you have a clear picture of your cash flow for twelve months that requires little of your time. Your net cash flow shows you twice monthly whether you plan on spending more money than you will have available. You have advance notice of budget shortfalls so that you can make adjustments to keep your budget "in the black."
You have a generous 60-day free trial period to get acquainted with both this amazing planning tool and your household finances. Get started today on your path to true financial peace of mind.