It can be easy for busy professionals to let financial management fall to the wayside.
But did you know that there’s a tool you can use to optimize your money in a more meaningful way? A cash flow plan is a secret weapon that kicks budgeting to the curb and helps busy professionals prioritize their financial well-being. It’s simple, streamlined, and puts your biggest financial goals front and center.
Here’s what you need to know about developing and implementing a cash flow plan that works for you.
- A cash flow plan focuses on how much money comes in versus how much goes out.
- With automation, you can prioritize your savings without lifting a finger.
- Your cash flow plan should evolve alongside you.
- Let your values drive your plan.
What's a Cash Flow Plan?
Let’s start with what exactly a cash flow plan is. Think of it as budgeting’s older, wiser sibling. Where budgets focus on the details, cash flow plans think big picture.
A budget encourages tracking every little expense—eating out, buying new clothes, grabbing coffee, etc. These are typically categorized as groceries, bills, utilities, or entertainment. Spend more in one category than you budgeted for, and it’s easy to become frustrated. Over time, that frustration leads people to abandon their budgets altogether. This, of course, defeats the purpose of establishing one in the first place.
Cash flow planning is relatively simple by comparison. It’s used to understand how much money is coming in versus how much is going out and how you can optimize both. Instead of the minutiae of budget allotments and constrictive categories, a cash flow plan gives you the power to allocate your resources intentionally. The primary focuses of cash flow planning include saving, investing, spending and giving.
Everyone’s cash flow plan will look different, and it should be based on your values, immediate needs, and long-term goals.
Interested in starting your own plan? Our team at AVID is happy to help you build out a custom cash flow plan that encompasses all priorities within your financial life.
Be Sure You're Saving and Investing
It might have been a while since you’ve boarded an airplane. But we’ve all heard the spiel - put your oxygen mask on before assisting others.
Think of your savings as your oxygen mask. You need to pay yourself first (i.e. put money into savings) before focusing on anything else. Prioritizing your savings and investments now is a necessary component of caring for your future self.
When money comes in, set aside a certain amount of money for yourself before spending. Too often, people spend first and save what’s left. Reversing the order prioritizes your long-term financial health first.
What’s considered the “right amount” to save will depend on various factors - your goals, your income, debts, etc. This number is also meant to fluctuate with your cash flow. The hope is that as you earn more, the amount you save will increase as well. Not sure where to start? Saving 20% of your income is a good rule of thumb.
While savings are important, make sure to create a comprehensive investment plan that aligns with your values. Investments, especially over the long run, are a critical piece of your financial puzzle.
Technology’s come a long way, and it’s done wonders to make your cash flow plan easier. Everything from paying bills to sending money to your savings has the power to be automated. Establish how much you went to pay and where the money’s going. Essentially, automation lets you set it and forget it.
When you don’t have to manually think about moving your money, it’s so much easier to complete the task month after month.
If you’re participating in your company’s 401(k) or 403(b), you’re actually already doing this! Your company is withdrawing money from your paycheck on your behalf and diverting it to a retirement savings account. Depending on when you opened your account, you might’ve even forgotten about it until just now.
It’s possible to automate other investments as well. As soon as your paycheck hits, you can have money automatically transferred to a brokerage account or IRA. Again, this simplifies prioritizing your financial future without lifting a figure.
Your bank may have the option to automatically transfer money to different accounts, so it’s not all just sitting in one place. Creating separate buckets for your goals is a great way to see how your money works for you.
Create an emergency fund, save up for a vacation or start building a downpayment for a house. You can establish accounts for each goal and have your bank automatically transfer money into each one every month.
Put Your Spending To The "Values" Test
When you get a raise at work, do your spending habits tend to change? For most people, the answer is “yes.”
Lifestyle inflation (or lifestyle creep) refers to increasing your spending as you earn more money. Instead of putting the additional money towards savings or investments, people spend it on higher car payments, new apartments, eating out more, etc.
Unfortunately, those aren’t things that make you happy in the long run. Financial wellness and the feeling of fulfillment are.
Instead of spending on extra and unnecessary things, consider how to spend the additional income intentionally. Maybe it goes towards an annual family vacation, increasing your investments, or buying a new home. Whatever you choose, this goal must be meaningful to you.
Make Changes When Needed
You go through stages in life, it’s only natural your wealth does too. Your cash flow plan won’t stay the same forever.
In fact, many factors impact your cash flow:
- Having children
- Changing jobs
- Getting married
- Moving to a new city
- Getting divorced
- Inheriting assets
As your situation changes, make sure you adjust your cash flow plan as necessary. And no matter what, remember to keep your values in the driver’s seat.
Knowledge Is Power
At the end of the day, you want to know where your money goes and if you’re using it to the fullest. You can only determine that by establishing and regularly checking in on your cash flow plan. Knowing your priorities are being taken care of is essential for feeling financially confident.
We enjoy collaborating with people to develop a plan and monitor its progress through all stages in life. If this is something you’re interested in, please feel free to contact us today.