What Is Cash Flow Planning?
Your cash flow can be described as the way money moves into, out of, or between your financial accounts on a monthly and annual basis. A healthy financial plan will include a cash flow plan which drives your money habits into alignment with your values and goals. Most folks know this cash flow plan by the more familiar term, “budget.” It may help to think on it this way: a budget is the plan, but cash flow is the reality of what’s going on with your money.
When you understand the reality of how your money flows into and out of your hands, you can create an effective plan for your spending and saving. Instead of wondering each month where your hard-earned money went, you can track the movement of every dollar and create a cash flow plan – a budget – which aligns with your values and goals and which helps to ensure you’ll have the funds available to live your life, handling whatever comes your way.
The goal of cash flow planning should be to:
- See with accuracy what your money is doing, and will likely be doing, over time.
- Promote discipline and accountability through an increased awareness of your money habits.
- Drive your spending and saving habits into alignment with what’s most important now and will be in the future.
- Asses Your Budget Monthly: After creating your budget for the month, you should track your spending with a spreadsheet, software, or app on a daily basis. At the end of the month, assess whether you’ve overspent, underspent, or stayed on budget during the month.
- Plan For Each Separate Month: Since your income and expenses could be dramatically different month to month, this should be reflected in your budget.
- Review Your Financial Goals: Similarly, your financial goals can change from month to month, so it’s important that your budget includes the steps to achieve them.
- Modify Your Budget As Needed: Once you establish a baseline of income, expenses, and financial goals, adjust your budget to reflect any changes you encounter along the way.
- Continue Reviewing Your Budget: Assessing your budget monthly, making sure that your cash flow plan aligns with reality will help you optimize your plan over time.
A Helpful Resource
To help guide you toward creating and managing a cash flow plan which aligns with your values and goals, I offer you this checklist, “What Issues Should I Consider When Reviewing Cash Flow?” It covers cash flow planning basics, including:
- Income sources
- Essential and discretionary spending
- Debt and taxes
- Goal funding
- Monitoring strategies
Life Doesn’t Travel A Simple Path
Something you are sure to notice over time is the amount of variability of your cash flow, both month over month and year over year. It is unlikely you will ever be able to count on a straight, simple path for your money to travel (flow) nor will the path be easily predicted. Regardless of where you are on your financial journey, you must expect and deal with the only guarantees you’re going to get:
Since we’ve all experienced those at some point, and know their certainty to reappear, we need to plan measures to minimize their negative impact on our financial lives. Here are some suggestions to consider:
- Surprises require margin.
- Change requires flexibility.
- And failure requires forgiveness.
Margin is your “Ambassador for Surprises” and will serve you by cushioning your finances when faced with the unexpected. These days adequate margin is missing in our all too busy, stressed-out lives. As an example, our calendars are crammed so full that when faced with any kind of delay, we’re likely to be late or miss the next event altogether.
Similarly, our finances are over obligated. Each month begins with every dollar already spent or pledged, where even small emergencies or random acts of kindness cannot be accommodated. Therefore, it is strongly encouraged that you include a “margin” or “cushion” category in your budget to absorb surprises that arise throughout your week, month, year, or retirement.
Without a margin category our budgets cannot be flexible. Something that is inflexible can break under stress, so it is equally important to be vigilant, monitoring your cash flow and adapting to change. The future is under no obligation to deliver past results, therefore planning for static income and expenses is fundamentally flawed and could be dangerous. A “set it and forget it” cash flow plan will simply not do. Whereas a healthy cash flow plan will be able to adapt to changes, whether intentional or unplanned.
Are you one of those folks who can face each of your mistakes being encouraged by the opportunity to learn and grow? Yeah, me neither.
Most of us do whatever we can to avoid failure and its painful effects. And with hindsight generously keeping an accurate record, we needlessly torment ourselves over our blunders. Failure is normal and should be expected as part of being an imperfect human. Brooding over our mistakes is neither healthy nor productive, in fact our very nature craves forgiveness. Therefore, we need to be quick to forgive ourselves, even when we don’t feel we deserve it.
Final thought about cash flow planning
The point of cash flow planning is to ensure you have the funds available to live your life and be able to handle whatever comes your way, whether common or uncommon, welcomed or unwelcomed. A good cash flow plan can put your money in order, and consistent cash flow planning will drive your money habits to support your values and goals while accommodating the inevitable surprises, changes, and failures.
I would love to meet with you over a phone or Zoom call and discuss my checklist, “What Issues Should I Consider When Reviewing Cash Flow?”