Part II. Personal Cash Flow
Ah, personal cash flow. Perhaps not the most exciting area of personal finance (if you find any of it exciting 🤣) but in some ways the most important. As the name "cash flow" implies, what this topic is about is monitoring the way cash flows both into and out of your life.
Managing your personal cash flow is really about balancing current spending with savings (for future spending). So there are really two elements to manage. First, understanding where you are spending money today. And second, how much you'll need to save for future planned spending. Future planned spending is just a more cumbersome (but hopefully clearer) way to describe goals for which you are saving. Those goals might include retirement, sending your children to college, buying a first (or second) home, or even planning for a year-long sabbatical from professional engagements.
No Blame & No Shame
When it comes to this area of your financial life (well, all areas, but especially this area), I'm a huge believer of Carl Richards' "no blame, no shame" philosophy. Personal cash flow work isn't about judging or shaming your spending habits. Neither is it about creating a super rigid budget which will be depressing to follow and a ton of work to keep up to date.
So if that's what cash flow work is NOT about... what IS it about? Keep reading... 👇
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Cash flow work is about clarity, intention & alignment.
Are these words that you associate with your personal finances? No?!
I think bringing this language and mindset to your finances is - if not essential - really beneficial. Let me explain a bit more about how I use the terms clarity, intention and alignment
Clarity means seeing clearly what level of spending and savings you currently have. Clarity also means getting gently precise about how much you need to be saving for your future goals.
Intention is all about your values. What is important to you? What do you value? Does your spending reflect that? If not, the intention phase is about defining more clearly the intent behind your spending. Spending money is one way we express (and support) the people, places and causes we value. For most of us, there is a gap between how we intend to spend our money and how we actually spend our money. That's because we're human and human don't do things perfectly. AND we can work to improve.... which is where alignment comes in.
Alignment is the practice of implementing your cash flow plan. We align your intentions with your actual practice of saving and spending. The tools you use to implement this alignment will depend on both your current situation as well as what works best for you.
The best tool to help you with aligning your cashflow will likely evolve over time. If you're consistently crushing a high level of savings, you'll likely want a low-engagement tool. And maybe you evaluate your spending at most once a month. On the other hand, if you find yourself consistently strapped for cash, then a more formal plan that you engage with on a more consistent basis (weekly, or maybe even daily) might be the right fit for you.
Cash Flow Management Resources
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Sure, you could develop a very precise budget with many different categories and then carefully track every penny to make sure you stay under budget. That's not the wrong way to approach cash flow, and it has to be the right fit for you.
There are many other methods (dare I call them philosophies...?) of cash flow management, and I've listed a few of the most prominent here.
And just remember, none of this is rigid. Play around with it. Find what works for you. Pick and choose elements from the different methodologies to create what fits for you at this point in your financial journey.
There is zero need to do this perfectly (whatever THAT means). The real point is bringing greater awareness to your spending, and that doesn't require anything near perfection.
I think the most important element is establishing a way to track your spending. Sometimes in life we just need to have the data. Sure, we might think we know how much we spend on dining out in a month, but what do the numbers actually say. Numbers bring us clarity. So even if you stop paying attention to your cash flow system for a few months (and we all do that), try and find a system where you can still go back and see the data for those few months when you're ready.
This is a classic way to organize your monthly spending. The name comes from the old school concept of taking the money from each paycheck and putting it in different envelopes, depending on purpose of the money. An envelope for rent, one for groceries, one for childcare - you get the idea. You spend out of each envelope, ensuring you always have funds when you need them, and never spend more than you have. This article from The Balance is a good overview and provides some additional color.
The Unbudget or Anti-Budget
Mary Beth’s writes beautifully about how simple a budget can be. I've heard her refer to this as an "unbudget." The article goes into detail, but the core idea is that she determines how much she wants to save, and then allows herself (and her family) to spend the remainder on whatever they want.
First Step Cash Management System
To me this feels like a modified version of the envelope method that is a bit more structured. You can learn about it on their website. This podcast episode hosted by my friends Scott & James also provides a great overview of the First Step methodology .
YNAB is somewhat of a technology tool and a methodology combined into one. The core idea is that you give every dollar a job. You can learn more on their website, and if you really want to try a sip of the Kool Aid, you can even read their book. To be honest, I've always found the YNAB approach a bit confusing, but I know many people who LOVE it and can't get enough.
Would you like an app to help you with cash flow? Boy, are you in luck - there are probably hundreds out there. And every day a new app seems to be released. Below is a partial list, including some of the most popular and well known providers.
Play around with them and see which one works for you. I'm a fan of experimenting with the free versions before committing. Then again, at some point you just have to commit - and spending money you can't get back is sometimes an effective tool to increase your commitment to a course of action.
YNAB (aka You Need a Budget). I discuss this briefly in the "Methods" section above. I find the method a bit confusing, but there is clearly something I'm missing because a ton of people love it.
Mint. This is the OG of cashflow software, it's been around for I think almost two decades - which feels like an eternity in the world of technology. Mint is now owned by Intuit, the technology company that offers TurboTax. Mint isn't the best tool, in my opinion, but it is free - if you can put up with the advertising. I also don't love the way Intuit has conducted themselves in upselling and obscuring the free software versions they promised to provide, which makes me try to avoid their services as much as I can. But they are a tool that's out there.
Tiller. I love Tiller, and it's what I use to manage my own cash flows. You have to love spreadsheets to love Tiller. Tiller creates a link between your financial accounts and either a Google Sheets spreadsheet or an Excel spreadsheet. This is one of the most flexible tools out there - which is great - but that flexibility means there is a fairly big learning curve. If you really love your spreadsheets, I encourage you to check Tiller out. Otherwise, maybe start with one of the other tool here and come back to Tiller if you desire greater flexibility and customization.
Mvelopes. The is a fancy technology implementation of the envelopes method, which I describe above in the "Methods" section. I haven't played around with this much, but if you like the idea of the envelopes method, this could be a cool tool to investigate. Some folks in my financial planning community are big fans of this software.
N26 is a Germany-based startup which has more recently expanded into the United States. N26 offers a banking solution, which allows you to use different sub-accounts to track and manage your spending. I have to admit, I'm not super familiar with them, but much like YNAB there are folks out there who really love this approach. If you're looking for an integrated solution between tracking and banking, N26 is worth considering.
Here are a few cash flow coaches I'm familiar with. This is far from an exhaustive list. I also offer cash flow coaching as part of my service offering, but if you want to go really deep on this subject, I suggest diving in with a coach whose sole focus is cash flow.
The distinction between a cash flow coach and a money mindset coach is fuzzy. You may also want to check out the coaches listed on the Internal Tools Page.
Emily Shull is a Certified Money Coach and owner of Me Myself and Money. She offers money relationship coaching for (as she puts it) "when you need help that goes beyond the numbers."
Capital One Money Coaching. This is a free service and you don't even have to be a current Capital One customer. It might not be the most comprehensive coaching, but the price is right and that might make it the right place for you to start!
How Much to Save Resources
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How much you need to be saving naturally depending on your goals: what are you saving for? How much will it cost and when do you need the money. That said, I'm also a big proponent of saving even if you don't have real concrete goals in mind.
I suggest you develop a practice of saving between 10% and 20% of your gross income. That's your income before taxes. (The easiest place to find gross income is likely your tax return. Look for the Total Income line on the first page of the 1040. For 2019, Total Income was found on line 7b, although the IRS has been fond of moving things around lately, so double check.)
Even if you're not saving for anything in specific, targeting 10% - 20% savings is going to give you a lot of flexibility down the road.
Is that level of savings always possible? Of course not. As I'm fond of saying personal finance is personal. Your specific situation will likely demand some deviation from the general rules of thumb presented here. But general rules of thumb, while not perfect, are so much better than simply flying blind.
If you consistently save 20%, you're almost certainly going to be in really good shape for a secure retirement and a lot of other things you'd like to do. If you saved at the 10% level, there will likely be some greater sacrifices you'll have to make in some areas of your life. Again, these are rough rules of thumb. None of this will be spot on for your financial situation.