Better Than a Budget: Cash Flow Awareness
Let's talk about cash flow awareness and why it's so much better than a budget. How to get in control of your spending and get on the path to time and money freedom: https://themoneyadvantage.com/cash-flow-awareness-better-than-a-budget/
We know that the more we save today, the more we have to put towards cash flowing assets in the future. If you are already saving 20 to 30% of your income, you're doing a great job, and this might help you up-level your awareness even further.
Why is cash flow awareness better than a budget? Well, let's face it. Budgeting stinks. It's all these things that I can't have and can't do.
We want to throw the budget out the window and approach our spending with awareness and consciousness.
First, start with your value system.
Start by adding in what's most important to you. Maybe it’s living in a particular neighborhood so that you can have the quality of life for your kids. Perhaps it's having enjoyable experiences on the weekend and making sure you get to travel.
It's essential when we look at the spending to get a track record. If you ask somebody how much they think they spend in a category, chances are, they're going to be way off track. We might think we spend $300 a month on groceries. Maybe it's $850 a month. We want to be aware of where our dollars are going.
How do we do that? I love using mint.com; this is free online software that synchronizes all of your accounts and transaction history. I like this because I don't have to enter data manually. Whatever you do, you want to look back at least 3 months if not 6-12 months. You want to get a good handle on where your money is going.
Next, you want to plan for the future and say, how much do I think I'm going to spend in each of these categories each month going forward.
Start with your fixed expenses. These are the expenses that you know, every month are the same, like your cell phone and mortgage.
Next, look at your variable expenses. These are things like groceries, clothing, eating out. You know you're going to have them, but you're not sure exactly how much it's going to be each month.
When you look at your variable expenses, we want to see things that happen on a periodic basis, maybe their annual or maybe their quarterly things like property taxes. What you're looking for here is how can you take what you're spending on a yearly basis and chunk it into the average monthly expense, so that you can put that into a plan going forward.
Then you want to account for emergencies. These are unforeseen events that we know are probably going to arise, but at the same time, we don't know when they're going to happen. We want to make sure we have an emergency fund so we can eliminate the stress of going through a cash flow crunch or wondering where the money is going to come from.
For the variable and the periodic expenses, we want to get a really good idea of what you have spent in the past and then be able to overlay that on the future.
Whether your income is the same every month or cyclical where you have certain months with really high income and others with less, you want to get a really good long track record of what that income is, and then average that down to each month.
If you can focus on having a clean picture from month to month on paper, even if your account in your bank account has those fluctuations, it's all going to average out if your averages work with your income and expenses.
We're looking for cash flow, that's that money that we don't spend each month. Cash Flow = Income – Expenses.
Ideally, you want to be in a position of 20 to 30% of your income is paid to yourself first, and then your expenses come out after that. How do you increase that?
If you're looking at your transactions on a regular basis, you're going to find places where you're spending is out of alignment with your value system.
It’s critical to put this on maintenance, so that every week you are having an honest, sit down conversation with yourself and any financial decision makers that are with you.
Ask, where are we spending that is in alignment with our goals. And where are we spending out of alignment? Do we have any additional income coming in this month, any less income coming in this next month?
When you have that awareness, and every single week your asking, what transactions have taken place? What adjustments should we make?
Cash flow awareness brings your spending front and center and puts your attention on it, and wherever you place your attention can thrive. Everywhere that you focus your attention can grow, and everywhere you ignore is going to shrivel up and die. Focus your attention on your cash flow, and that will increase the amount of money you have leftover each month which then allows you to have more to save and more to build cash flowing assets with so you can create time and money freedom.