How to make a cash flow plan and stick to it.
Cash Flow Planning – the easy way!
Everyone, we need to talk… about cash flow planning! It’s not a subject most people want to even think about, let alone talk about, but we think we have the answer! It‘s a budgeting plan that eliminates the need to actually budget! Watch on to see our cash flow planning model and some nifty drawings that help explain.Posted by Claringbold Financial Services on Wednesday, August 1, 2018
One of the key ingredients to achieving your financial goals, is budgeting.
Budgeting is a little like dieting. There’s lots of options, it can be hard to stay motivated and unless it becomes part of your lifestyle, you won’t get the results you’re after. So, instead of budgeting, putting together a cash flow plan may be a better option for a lot of people – we’re going to show you how to make a cash flow plan that works, in four easy steps.
Step one: Record your last 12 months expenses in a spreadsheet.
Most banks give you the ability to download transaction records that you can save in a spreadsheet. If not, we have tools that can help. Once you have your last 12 months expenses, categorise them into groups. For example, Daily living as a category would include groceries and clothing. Home expenses would be mortgage payments and power bills. We can help out with a list of categories that you can use.
Step two: Allocate your expenses between core living costs and discretionary costs.
Core living costs include the basic essentials such as groceries, power bills, house rates, etc. Discretionary costs are those that you don’t necessarily need, such as going out for dinner or Foxtel. This is an important step and you need to be honest with yourself. It’s easy to become disconnected with your money with paywave, applepay and internet shopping.
Step three: Write down your three most important goals.
These should be things that give you purpose, can make you happy and are meaningful. Making a list of goals isn’t always easy but we believe that having purpose will really help you focus on the things that are important to you. This is something we help our clients determine.
Step four: Create your cash flow plan.
You’ve done all the hard work. You know what you spend money on and what your day to day expenses are. So now all you need to do is organise your cash flow. To do this you need two bank accounts. The first account, which can be a mortgage account with redraw facility, or a mortgage offset account, is where all of your income is paid into. From this account you pay most of the core expenses such as power bills, council rates, insurances, and anything else that you can set up direct debit payments for. These are payments that you have to make so automation is the key.
The second account is your day to day living, which includes your groceries, petrol and maybe coffee if that’s a daily expense. On this account you’ll probably need a Visa debit card (not credit). Going back to how much you spend on day to day living, set up a regular transfer from Account 1 to Account 2. As a guide this will typically be between $350 and $500 per week. This account is used only for your day to day expenses.
If you run out of money in account two, it means you’re over spending. If you’re saving money in account two, it means you can reduce how much you’re transferring from account one.
That’s it. Easy. But there’s one more thing. Back in step three you made a list of your three most important goals. This list is there to remind you what’s important. So when you’re out shopping, or see something on the internet that you really want, ask yourself one question, if I buy this will it help me achieve my important goals? Asking this question will help you make more meaningful buying decisions, it’ll provide focus and make your spending habits more purposeful.
So, by following this four step process you’ll put in place a cash flow plan that works, is easy to track, and will tell you if you’re spending more than you should.
If you have any questions or would like access to any of the tools we use, please call or email.