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Once you have prepared an Expense Estimate, and have a month or two of Expense Log info, take the next step and create a cash flow plan that estimates your income and identifies specific dollar amounts for each expense type. Use the Cash Flow sheet to split up your income between savings and checking accounts for each of the expense types, and to guide your decision making when spending money.
Cash Flow Spreadsheet (.xls file)
The Cash Flow sheet is pretty much the same spreadsheet that you used for the Expense Estimate. The difference is that you write a new Cash Flow spreadsheet for each month, and adjust your income and expense projection to fit that month.
If your income varies by season, adjust each month in the Monthly Cash Flow worksheet. List your income sources and estimate your take home pay for each month over the next year. I generally use net income, after tax take home pay in cash flow sheets.
Some expenses vary by the season. You may want to increase the gas expense estimate during winter and reduce it in the summer. The electric bill will likely be higher during air conditioning season. Go through the Monthly Cash Flow sheet and adjust expenses that vary throughout the year.
Now you enter your income in and get the bad news: you want to spend more than you make. So adjust the expenses types, balancing your priorities, and find a break even solution that balances your need for each expense type. Remember that the Cash Flow sheet is just a representation of your spending patterns. You can massage it all day to make it fit a goal, but its only useful if you can actually make your spending pattern fit the budget. You will be more successful if you are realistic.
OK, you have split up your budget between the following expense types:
* Regular Expenses
* Debt Service
* Variable Expenses
* Annual Expenses
* Strategic Expenses
* Emergency Expenses
* Investment
Now set up your banking account, preferably an online banking account with an automatic bill payment plan. The accounts should look like this:
* Debit Checking - Variable Expenses
* Main Checking - Regular Expenses, Debt Service and Investment
* Annual Savings
* Strategic Savings
* Emergency Savings
Deposit all income into the Main Checking account.
Establish an amount for Variable Expenses. Set up a checking account with a debit card for variable expenses. Each month, transfer the budgeted amount from Main Checking to the variable expenses checking account. Separating variable expenses into their own checking account, and transferring only the budgeted amount for those expenses in the account is a good way to make sure your discretionery spending does not get out of control.
The Main Checking account is used to pay most other expenses, preferably using an online bill payer feature. Payments for Regular Expenses, Debt Service and Investment can be set up as automatic payments. Other expenses, such as annual expenses or additional payments to debt service and investment can be entered manually each month.
Using your Annual Expenses spreadsheet, set up an automatic, monthly transfer from Main Checking to the Annual Savings account in the amount of the monthly average Annual Expense. When you pay an Annual Expense, pay it from the Main Checking and transfer that amount from Annual Savings to Main Checking.
Based on your past experience, your Expense Estimate and Expense Log, estimate a monthly average budget for Emergency Expenses. Set up an automatic monthly transfer from Main Checking to the Emergency Savings account designated for emergency expenditures only. This amount should be used only if emergency expenditures occur. When your emergency fund reaches two or three times your monthly income, you can shift the monthly transfers to investment. If an emergency expense occurs, try to use discretionery expense money. If that does not cover it, take only as much as you have to from the emergency fund, and then start replacing the emergency fund again with monthly payments.
Estimate an amount to set aside each month for Strategic Purchases and set up an automatic monthly transfer from Main Checking to Strategic Savings. If you add up all the strategic purchases that you intend to make, your monthly payment to the strategic purchases savings account should allow you to purchase the items on schedule (only if you are lucky!)
Set up your Investment budget amount as an automatic payment to your investment brokerage account. In additional to the regular, budgeted investment payments, you may be able to transfer additional funds, for example if you do not spend all of your discretionery expense budget, at the end of the month, sweep the remainder to your investment account. As you pay off debt, redirect funds to investment.
This system requires a certain amount of maintenance. If you are able to set up automatic payments and transfers, and you have a predictable income, this method requires less work than writing paper checks for all your bills. However, every bank is different. For example, I have to deposit checks in my debit checking and transfer them manually. Also, my transfers from the main checking to the other accounts are all done by hand. A checklist and schedule posted above my pc are very helpful.