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Cash flow management, the easy way

I am a huge personal finance nerd. I left firmware engineering (which I love!) because whether it's investing, insurance, taxes, estate planning, credit card optimization, long-term projections, or yes, cash flow management, I love it even more than coding. Going into my budgeting software of choice every week, categorizing all my transactions, and moving money between my "virtual envelopes" to keep my cash flow running's meditative for me.

But I'm weird like that. Chances are, if you're reading this blog, you're weird, too...but probably not that weird. "Budgeting" in the sense of watching every dollar every day isn't for most people; sure, you could probably do it for a few months, but after a while most people burn out. If you're one of those, here's a cash flow management system that's sustainable for the long-term, and is pretty easy to maintain once it's set up!

Rule #1 of budgeting

Seaborn's Adaptive Financial Planning approach is centered around combining intentionality and flexibility: have a plan, but be prepared to change the plan. This helps you make sure you're heading in the right direction, while still allowing you to change course as necessary.

The way this plays out in cash flow management is Rule #1 of budgeting (courtesy of You Need A Budget): "give every dollar a job." Know what your money is for, and make sure it's going where you want it to go!

If you're familiar with Dave Ramsey's "envelope system", this is a prime example of that: by putting physical cash in envelopes marked "groceries" or "eating out", you are literally giving every dollar a job. YNAB allows you to do this virtually, assigning your dollars to virtual envelopes in a similar fashion. And this is an extremely effective way to give your dollars jobs (and ensure they stick to them).

It's also not easy for most people to sustain. The good news is that you can modify the "envelope" approach to something that's a bit more general, but a lot easier to operate: a "bucket" system!

Bucket cash flow management

Rather than "envelopes", I recommend most people set up "buckets" in the form of separate accounts, each with a specific purpose. Here's a list of common buckets for you to consider.

Your core bucket is a checking account that's basically Grand Central Station for your money: all your income goes into it, and every month, money flows out of it via automated transfer into your other buckets. Also, your regular bills -- rent, utilities, subscriptions, etc. -- come out of this account.

Your spending bucket is a checking account that you use for spending -- groceries, eating out, Target runs, etc. This is the only bucket which you actively need to track on a regular basis: rather than determining whether you're within your grocery/eating out/entertainment budget, you just need to track the overall balance of your spending bucket and adjust general spending accordingly.

Sure, you might choose to combine your spending and core bucket, but this way, you don't have to worry about upcoming bills when you're thinking about spending -- they're already taken care of by your core bucket!

And if you share finances with a partner, you might consider having "yours/mine/ours" spending buckets. This can help ease the friction of negotiating expenses with your partner!

Your emergency savings bucket is a savings account that is only tapped in case of an emergency: medical, home, auto, or job loss. This bucket is worth an article in itself -- and lo, such an article exists!

Your targeted savings buckets are savings accounts for each of your large short-term goals: the down payment on your next car, your next big vacation, etc. "Large" is entirely up to you and your cash flow, but a good litmus test is "does it cause you stress to not have money specifically saved up for it?"

Your college savings buckets are a variant of targeted savings buckets: separate investment accounts (taxable, 529, or both) for each of your children's college savings accounts.

Your retirement buckets are your other investment accounts, including both taxable and tax-advantaged accounts, like 401(k)'s, IRA's and even optimized HSA's. By definition, these are for "retirement", but because it's not unlikely that you may want to change course between now and then, I recommend building in some flexibility. In other words, don't necessarily sock all the money into a Traditional 401(k) where it's difficult to get to! (FYI, Roth IRA's are a great way to combine flexibility and tax savings for long-term investments.)

All in all, your bucket cash flow management system may look something like this:

So just like the envelope method, every dollar still has a job -- it's just that now the job might be "spending" or "bills" rather than "groceries" or "mortgage". You'll need to crunch some numbers and open a few accounts to get it going, but once it's set up and your monthly automated transfers are setup, all it requires is a little tweaking now and then as your income and expenses change!

Of course, the devil is in the details. Here are a few common questions that come up.

How do I transition from the way I'm currently handling my cash flow?

Obviously your mileage is going to vary -- quite a lot -- but I can give some tips that should be helpful.

  1. Try to make all your changes all in one sitting, rather than spreading it out. (It shouldn't take more than an hour or two, once you've figured out your plan.) The more you spread it out, the more weird stuff may crop up -- money not in an account when you expect it, etc. Expect to send your full weekly money time on this, and budget some extra time, just in case!

  2. That said, be aware that inter-bank transfers may take 1-5(!) business days, depending on various circumstances, and changes to your paycheck direct deposit may take a full pay cycle, so don't assume things will happen immediately!

  3. When transferring your initial balances to your buckets, consider aiming for a minimum of one month's bills and spending in your core bucket. Sure, that's cash that might otherwise be in investments or a targeted savings account, but the opportunity cost is often outweighed by not having to track your account balances on a daily basis!

Why have all money flow through the core bucket?

Why not have the money go into your and your partner's personal account first, and then into the core bucket? Or why not have some of your paycheck direct deposited into the targeted savings account? Why have everything flow through the core?

It's a good question, and it really comes down to awareness and control: by having a core bucket that serves as the hub, you have One Place to go to if you want to figure out or change what's going on. All income ultimately goes into it, and all expenses ultimately come out of it, so if there's an issue, you can quickly suss it out and fix it simply by going into your Core Bucket. Otherwise, you've got money going hither and yon, and in my experience with clients it's easy to lose track of what's going where!

What if you're not paid monthly?

If you're paid biweekly or semi-monthly and you followed transition tip #3 above, that's actually not an issue; you always have at least enough money for a month's worth of bills and spending in your core account, so the timing of your income isn't really relevant!

If you have income from bonuses, RSU's, and suchlike, I recommend treating each as a "one-time" event; rather than setting up automated transfers, sit down and figure out what you want to do with it each time it happens, making the transfers manually after they hit your account. Top off your core bucket if necessary. If you have debt, consider whether you want to pay it down. If you have targeted savings accounts that still need funding, consider funding them. If they're all set, consider investing for the long-term (retirement), whether in a taxable account or a (Roth) IRA.

How do credit cards work here?

If you're purely using debit cards and ACH transactions to pay for things, the bucket system is pretty transparent. If you -- like 95% of my clients -- have credit cards whose rewards you'd prefer not to miss out on, then there are a few things to consider.

First: I highly recommend having at most one bucket associated with each CC. If you want to play the rewards game and have multiple CC's linked to that bucket, that can work, but if you decide you want to separate e.g. your spending bucket from your core bucket, then having the same CC linked to both of them is likely going to break your system.

Paying your bills out of a CC linked to your core bucket works seamlessly, because then your CC payment is basically just another bill. That one's easy!

However, if you have a separate spending bucket, then it probably means you're trying to control your spending, and that's going to be much easier to do with a debit card than a credit card. With a CC, you'd have to track the balance and make sure it doesn't go above a certain amount; with a debit card, all you have to do is make sure your spending bucket doesn't go to zero!

Finally: if you've decided you want to go the yours/mine/ours spending route, seriously consider using debit cards for "yours" and "mine", for two reasons: (a) the reason I mentioned in the paragraph above, (b) for most clients, I've found that personal spending is small enough that the rewards wouldn't be worth the extra hassle of the additional credit cards, and (c) running up credit card debt that's invisible to your partner is...well. The most painful client meeting I've had to date was a direct result of that, and I'd rather have had a root canal -- and I wasn't even the one in the marriage!

How about you? Got a question, or a bucket variant that you'd like to run by me? Feel free to add a comment to this blog's link on Facebook or LinkedIn, or even just drop me a line -- cash flow management is one of my favorite topics to geek out on!

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.

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