When we begin working with a new client at Mullooly Asset Management, the first step in our financial planning process is compiling a household statement of cash flow and balance sheet. Cash flow impacts so many other areas of personal finance and investing that, without it, we’d be driving blind.
As an exercise, I thought I’d share how my wife and I currently handle our monthly cash flow. After all, we’re constantly stressing the importance of cash flow to clients, and I believe transparency is the best policy.
Let me begin by saying that I’m definitely not dogmatic about our cash flow strategy. As a financial planner, I’ve come across various cash flow strategies, and can confirm there are many ways to skin this cat. It sounds trite, but everybody needs to find what works for them when it comes to cash flow. But, I figured it couldn’t hurt to share our process. I’ve learned from seeing what others do, and perhaps this will serve a similar purpose for someone else. At the very least, it’ll allow me to chuckle when I revisit this in a few years, and see how much has changed.
This is what currently works for us:
My wife and I share a joint checking account, which all of our net paychecks flow into. We automatically deduct our regular monthly bills directly from this account – mortgage, utilities, insurance premiums, subscriptions. We also use the joint checking account to buy groceries and household items each week.
We automatically deduct savings directly from the joint checking account, too. I’m far from the first to say this, but treating savings as another bill ensures it actually happens. It positions us to spend what’s leftover rather than save what’s leftover.
Beneath the hood of “savings” we have several different buckets. After my experience saving money for a past goal (detailed here), I’ve become a huge proponent of mental accounting.
Each month, we save into a few different buckets:
– Retirement Savings – Money we position for growth and hope to never touch for decades
– Emergency Savings – Money we position for stability and hope we never need to touch
– Home Improvements and Repairs – Money we position for stability and intend to use or need in the short term
– Travel and Experiences – Money we position for stability and intend to use in the short term
– Misc. Irregular Expenses – Money we position for stability and expect to need in the short term
All but the retirement savings goes into online savings accounts. We view the other buckets as relatively short-term in nature. In fact, some of these buckets aren’t really savings at all, but deferred spending mechanisms (although, I suppose that’s what all saving is technically). We hold this money at the bank, despite prevailing interest rates, as we anticipate spending it over the next couple of years. We use the “buckets” feature that Ally Bank offers because it allows us to separate money by its purpose without actually opening several different accounts.
We have an agreed-upon target number for our Emergency Savings bucket based upon our total monthly expenses and personal comfort-levels. We periodically review the account balance. If we haven’t needed the money, we take whatever the balance is above and beyond our target number and add it to our retirement savings. This ensures that the savings habit continues, so in the event we do ever have a true emergency, it won’t feel so painful to rebuild the balance. There’s an opportunity cost to holding “too much cash” (another instance of needing to find what’s right for you), so this is our rebalancing mechanism. We’d like to automate this process more, but, for now, it’s manual.
Finally, in addition to our regular monthly bills and saving, my wife and I both have personal credit cards. This is where we do our discretionary spending. We have an equal monthly number that we aim to keep our respective credit card bills beneath. This gives us the flexibility to spend that portion of the budget however we each see fit, while also providing some guardrails in terms of what we’ve agreed we can afford on non-essential stuff. We both pay our balances in full every month directly from the joint checking account.
We’ve right-sized each of these cash flow items to be a reasonable percentage of our current take-home pay, and feel that they accurately reflect our priorities in life. We also adjust the overall dollar amounts accordingly as our income/situation changes. This is crucial to avoid lifestyle inflation – the silent assassin of financial plans everywhere. As the years roll on, I anticipate we’ll shift where our money goes as our priorities and lives change – cash flow is far from static. This, and a host of other factors, is what makes financial planning a process, not an event.
There’s no such thing as perfect when it comes to cash flow, but this is what currently works for us, and that’s what matters most. I look forward to the continued evolution of our personal cash flow.