A recent post detailed the complexity and nuances of personal spending decisions. This week let’s take a closer look at some cash management strategies that actually work.
1. Structure is your friend; poor man’s bookkeeping works.
If all of your income comes into one account and then is dispersed helter skelter to various planned and unplanned spending, it’s hard to keep track – much less manage – overall spending. At best, you are reduced to a confused clerk of your daily cash flow. Ouch. What’s good about that?
Imagine instead if your account structure reflected the meaning and purpose of various cash flows. What if, for example, income automatically filled an escrow-type account from which you pay the planned large expenses, e.g. expenses such as property taxes that come due in large “lumpy” amounts each year? Let’s assume as well that the double handful of regular expenses which you pay monthly, e.g. your cell phone bill, are scheduled for automatic electronic payment within a day or two of the automatic deposit of your regular income. Of course, let’s also assume that these regular automatic transfers include whatever monthly savings you have decided to do by policy, not happenstance. The result is that you have delegated to machines the repeating administrative details of your spending policy decisions. You are promoted from clueless clerk of your cash flow to effective manager. Congratulations!
Plus, your daily checking account becomes an ever more accurate reflection of cash available for discretionary spending. “Shaking the shoebox” becomes informative.
Want to go further? Imagine a couple of smaller “mini-escrow” accounts that you fund –again automatically – in order to save up for such aspirational expenses as a new car or the next big family vacation.
Now think through what would happen if regular cash flow is disrupted by either a windfall or a blow to available cash flow. As manager, you will be well-positioned to make an informed policy decision. For windfalls, you know how close you are to funding specifically identified aspirational expenses and therefore how you might allocate extra cash. In contrast, if there is a sudden cash shortage or concern, you can look at the aspirational “mini-escrow” accounts – or even your emergency cash reserve – to decide how to gather up the necessary extra cash.
2. Automation is convenient, effective, and protective.
Convenient: There’s no point spending personal time and energy doing repetitive implementation of choices you have already decided to make. There is no extra value in writing a check for, or manually clicking for online payment, the payment of a regular bill you have already committed to pay. Reclaim those lost hours of personal time; automate! Delegation works.
Effective: With savings on automatic, you literally pay yourself first – and reliably. If you don’t pay yourself first via an automated transaction, be prepared to not get paid and to not meet savings goals. For most of us, cash “left over” at the end of the month is not sufficient to safely fund personal savings.
Protective: If you lead a particularly busy life and especially if you travel a lot, automation is protective. Bills get paid. Saving continues as planned. Automation is particularly protective for the elderly – by automating payments while you are still at the top of your game cognitively, you lay an important safety net for when cognitive skills begin to slip.
3. Go electronic but keep some cash at home.
The global banking system is efficient and convenient, and regardless of whether or not you automate personal transactions you are a part of it. As a minor personal safety net, consider having some extra cash at home. How much cash would you need to be comfortable through a three to five day period without access to a working ATM and without the ability to pay expenses with a credit card or check? It is not likely that we’ll have a banking holiday or that you will lose your wallet or suffer a financial identify theft, but wouldn’t it be nice to have a stack of $20 bills at home if one of those events did happen?
NOTE: Check your home insurance policy to understand coverage limits for cash held at home.
4. People who live in small houses often take big vacations.
Think about the people in your life whom you admire for their personal financial management. Dollars to doughnuts they either by plan or simply by personality keep necessary expenses low relative to income. When cash flow needs are low relative to income, you have much more discretionary cash to allocate as pleases you. Discretionary income is the fundamental financial metric for financial freedom. Get liberated!
5. Families can talk about money matters.
This is an easy idea to forget. Don’t give up. A good solution has the right balance between necessities and giving each person the space and autonomy they need in terms of making solo spending and saving decisions, and how to keep track of income and expenses. Good solutions also facilitate celebration and appreciation of small successes. Want to rev up this aspect of your family life? Start with listening. Consider the idea that you don’t yet fully understand your partner’s point of view — and vice versa.
As a final note, consider if these topics are a regular part of the conversation with your financial advisor. If not, are you with the right kind of advisor?
Originally published: April 3, 2013