At Aptus, we believe that happiness, peace of mind, and financial freedom hinge on spending less money than you make. A good cash flow plan should help you determine the best balance of spending on important things like a home, childcare, education and travel while setting aside enough money to build an emergency fund, pay off debt and invest appropriately for retirement.
Our recommended cash flow system includes 4 basic steps:
1) Pay yourself first through payroll deductions into company retirement plans, automatic drafts toward debt repayments and consistent, automatic investments into IRAs, HSAs and other investment accounts. The goal is to save 10%-40% of gross pay for retirement before you even see your take home pay.
2) Set aside money for future expenses by auto-transferring fixed amounts each month into individual, named savings accounts at your financial institution (or use one savings account with "buckets"). For instance, you might set up individual savings accounts for home repairs, car repairs/purchases, healthcare emergencies and vacations. You should proactively save for any known future expense, even if the timing is uncertain. Ideally, you would also maintain a separate emergency fund sufficient to cover 3-6 months of expenses in case of events resulting in a loss of income.
3) Pay your monthly bills, typically through auto-drafts. We recommend leveling out variable expenses like utilities to maintain consistency each month. Carefully accounting for all your bills provides an opportunity to eliminate or reduce expenses when feasible.
4) Spend the rest by auto-transferring the remainder of your money—what’s left over after steps 1 through 3—into a 2nd checking account and using debit cards to spend it. We recommend setting up a weekly auto-transfer into the 2nd checking account each Monday, as it is easier to plan your expenditures over 7 days than 30 days.
If you do nothing except step 1, you could still end up having enough money to retire but may bounce in and out of debt due to one financial “emergency” after another. If you do both steps 1 and 2, you should be financially healthy. If you’re mindful of all 4 steps and optimize your spending across all 4 steps, the cash flow system can provide happiness, peace of mind, and freedom.
Amazing, right!?! The roof leaks. No worries, you have a home repair fund! The car broke down. No problem, you’ve been saving for a new one anyway! Your job is a grind. That’s ok, you have enough breathing room in your budget to be able to start your own business! The kids’ college educations are going to cost a fortune. You’ve been saving into a 529 plan to help cover tuition! You need a little time to recharge. Time to use your vacation fund for a trip to Italy this summer!
Perhaps most importantly, a good cash flow system is relationship enhancing. You and your spouse will never really argue about money again. All the money drama is gone, because the system sets your financial life on auto-pilot.
So what’s the catch? Well, the system is easier to discuss than implement. It takes time to set up the mechanics of the bank accounts, but you can do it. What can be more challenging is developing your priorities and making sure the cash flow system reflects those priorities. Ultimately you need to strike a balance between your lifestyle and your financial security. This typically requires a lot of thought and a lot of effort. We recommend working with a financial planner to design and implement a cash flow system that works optimally for you and your family.