Cash flow planning is the secret sauce of mastering your money. Cash flows in, cash flows out. Mastering how much and when matters. I have always planned cash flow, but long before I knew to call it that. You, wise reader, are a step ahead, because you are reading an article about personal cash flow planning! So smart.
What's In This Post
What is cash flow planning for personal finances?
A budget is something that dictates how an amount of income is divided. Say $1,000 is split into $500 for rent, $200 for utilities, $300 for groceries. That $1,000 is budgeted out. Great.
Cash flow planning is controlling when the inflow and outflow of that cash happens (with or without a budget). For example, you know you’ve got that $1,000 of income to pay the rent, utilities, and groceries. But if the rent is due the 1st and the $1,000 of your income doesn’t show up until the 5th, you have a problem. Solving that is cashflow planning.
I prioritize cash flow management even over budgeting (the latter which still seems to get more attention for some reason in other cash flow articles). Once you master neutral (or better yet positive!) cash flow, it’s much easier to strategize the distribution of your money into target areas (i.e. budgeting). In other words, cash flow management comes first.
In business, where managing irregular revenue, purchasing inventory, making payroll, and more are all at play, managing cash flow is critical. But this way of thinking is also magic for smooth running family finances.
Do you actually need a personal cash flow plan?
Maybe you could stop reading here. Make sure enough money comes in before you pay it out. Simple enough.
But how do you do this without pouring over a calendar every month with bill due dates in hand? And without checking your bank account every day? All the while, you’re crossing your fingers you can make it pan out without an overdraft or a late payment. That’s too stressful!
Maybe you just keep gobs of money in your checking account so you never have to think about cash flow planning, and just let your bills pay on autopilot. Not so stressful, but lots of missed opportunities to be more strategic with your money! And, of course, not everyone has gobs of cash to serve no other purpose than to buffer their checking account.
Yes, you need a monthly cash flow plan, a money management system that seamlessly tracks and plans your cash flow. You need it to avoid problems like overdraft fees and late payments. And you need it to be fully intentional and strategic with your money. That last bit is key to financial planning designed to help you live your best life.
How to manage personal cash flow
Free spreadsheet template
How? Simple. Use my spreadsheet system that also serves as your monthly bill payment checklist. The checking account tab in the spreadsheet separates transactions into two columns. (When you download the free spreadsheet from the form below, you’ll get a tab for tracking savings and organizing your debt payoff as well) The built-in template and example will guide you through setting up your own spreadsheet. Grab yours here instantly:
The main column of my spreadsheet template automatically sums to the available balance of the account- that’s the Completed Transactions column. The column next to it holds the dollar totals for all the subsequent line items that are still Planned Transactions. They aren’t getting summed up in your total, but by dragging/dropping any amounts ahead over into the Completed column, you can see where your cash flow is going as the weeks and months pass. Then just ‘undo’ to send those simulated dollar totals back to their Planned column after you’re done checking on your cash flow ahead.
The spreadsheet for the checking account flows down the rows generally in blocks of income, auto-debit transactions, and the transactions you have to schedule or write a check to pay. But it also flows down the rows roughly by date. Rows in the spreadsheet form a block for each month, and within each month you can organize the transactions by their automatic deposit/debit date or due date.
Projecting the future begets planning ahead
This flow of transactions across time is cash flow planning. When you drag and drop a clump of Planned transaction dollar amounts into the Completed column and the total available balance goes negative, you know you’re coming up on a problem.
When you see a negative cash flow problem coming in advance, there’s still time to avoid problems. You can be sure to make a deposit, or transfer money from cash reserves in savings temporarily, implement a spending freeze, or whatever is needed. This way, you avoid relying on credit cards as a rescue tool (dangerous!) and avoid wasted money on penalties, fees, and the long term effects of a poor credit score.
And then you can look ahead to the following months to make modifications. Continually adjust your spending habits, find ways to increase your income, or make other adjustments. Tweak in advance to ensure that same problem won’t keep happening. Finding problems before they happen is a game changer.
The trick to avoiding regular cash flow problems
The best way to ensure cash flow planning isn’t a headache each month is to pay your bills with last month’s income. All your pay from January shouldn’t be touched until you’re paying February’s bills.
In order to accomplish this, you may need to amass a month’s worth of income to get yourself fully ahead. If you’re paid biweekly, start by getting two weeks ahead. Then treat your cash flow planning (i.e. bill paying flow) in two week increments. Then push yourself two weeks further. To learn how to get a month ahead so you can pay bills with old money, visit this post for 8 strategies to shore up the cash.
Long term spending plan
The same spreadsheet approach separating Completed and Planned transactions that you can simulate ahead can be used for big picture planning as well. You can copy/paste a month’s block of typical transaction amount multiple times, even a year’s worth. Then you simulate where you’ll be after 12 months of consistent, similar income and expenditures as you have today.
When you simulate your long term cash flow, you can add in occasional or irregular expenses. These expenses might be semi-annual or quarterly bills, taxes, or occasional big ticket spending (vacation, Christmas gifts, kids sports sign ups, etc.). I recommend line iteming these irregular expenses as part of your three-layer savings account instead so they are covered from money you set aside there. But certain smaller ones you may absorb throughout the year in your normal checking account flow. And if you don’t have a three-layered savings plan to handle these expenses, you must include them in your long term cash flow planning! If not, they will bite you when they come around. Every time.
Irregular income
Cash flow planning is especially helpful if you have irregular income. You may use the same spreadsheet discussed above, where your expenses may be quite similar month to month. But since your income is not, the tracking ahead will inform how much total cash inflow you need in a given month, quarter, or year.
Your irregular income can go straight to a savings account. Then, based on the timing of your bills, you can determine the correct amount to transfer to the checking account to handle the cash outflow for covering bills in each of your accounts each quarter or month.
Key takeaways for cash flow planning
Managing how much and when money comes in before it goes out is essential for financial security. And it’s just plain good for peace of mind.
A key factor to automatically solve cash flow problems is to be a month ahead of your bills. Do this using these 8 strategies.
Tinker with my free spreadsheet to create a cash flow system for your home finances. Once you get comfortable with a system like this over time, you’ll wonder what you did without it! Learning to implement a spreadsheet like this is an investment in smooth running finances for the long term.
As always, reach out with questions. I’m here to help: familymoneymentor@gmail.com
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