Cash flow is a product of the relationship between your income and your expenses. There are many people out there who are earning healthy salaries, but whose expenses eat much of that up. Thus, as long as you can control your expenses, you can actually earn considerably less than your neighbors, but have better cash flow.
Ultimately, if you’re looking to improve your cash flow situation, you need to make more money or reduce your expenses. Today, I’m going to focus on developing a system to better track and understand your cash flow.
Choose your budgeting tools
The first step is to identify the best tool for monitoring and managing your monthly cash flow. While you might not be able to find the perfect system, you’ll undoubtedly be able to find one that works for your needs and goals. I’ve tried a few myself, and have found some really good ones.
I use Mint on a regular basis to track of our spending habits. I’ve told my family about using this tool numerous times, and it’s helped those who have tried it.
Pro: I absolutely love receiving an e-mail on Fridays with a summary of what we’ve spent, and our current progress relative to our budget.
Con: While Mint does a decent job of categorizing spending, it can’t separate things like grocery and electronic purchases at Walmart. I also can’t add one of the credit cards that we have.
Quicken is one of the most popular financial programs, and for good reason. I use this for our retirement accounts, my home business accounts, and for our overall net worth updates.
Pro: Quicken has a ton of features and capabilities, so you’ll be able to do just about anything you need.
Con: It may too feature-rich, and distract (or overwhelm) users who are looking for only the basics. Also, it’s a local software solution, so you won’t have access to your data online.
I first heard about PocketSmith from ManVsDebt as he was doing his financial transparency project.
Pro: PocketSmith offers a calendar view that can help you see how quickly small expenses can add up. PocketSmith also has a forecasting tool that is very useful.
Con: Some people may want to just see the big picture, and the granularity of the daily view might just get in the way.
You Need a Budget
After reading different reviews of YNAB, I decided to try out the free trial version myself to get a better idea of how it works.
Pro: YNAB had a lot of great built-in tools, such as the debt snowball. Installing the program was easy, and once I got my accounts imported, it worked like a charm. They also offer free, live coaching to help you get up to speed, and they also have great user forums.
Con: Some will find the price ($59.95) a bit much after the free seven day trial. The upside is that it’s a good program for those looking to manage their money. For those scared away due to price, I’d download the trial and play around with it. I think YNAB could work for many households.
Your own Excel or Google spreadsheet
We use Google Docs and share a spreadsheet with our monthly budget plan. It started out as a simple spreadsheet when we got married, and it has grown more complex over time.
Pro: You have complete control of how you want to manage and handle your budget. I love how you can share your document with one another, keeping everyone on the same page. Also, it’s free!
Con: Manual updates… You have to stay on top of every expense and paycheck to keep it up-to-date. This can get tedious, and one mistake can leave you frustrated as you hunt for it.
Preparing cash flow projections
After you’ve established a pattern for your income and expenses, you can start setting goals and making financial projections. Here are some examples:
- Replacing a car: All cars break down eventually, so start planning to eventually replace your current car.
- Expanding your family: Having kids can be a huge blessing, but they’re also an enormous expense. Before making a big decision, figure out what impact it will have on your budget.
- Dream vacation: You should already have “regular” vacations built into your budget, but what about a dream vacation. It could be for a month overseas for the entire family, or a volunteer project you want to completely focus on without the constraints of your work schedule, or… Whatever. Start planning now.
By planning ahead and directing your free cash flow into a dedicated high yield savings account (or investment account, depending on your time horizaon), you can make your dreams a reality. The worst case scenario is that you’ll have extra money tucked away. That’s better than having a huge event with nothing to protect you financially.
Have you used any of the methods or tools listed above to track your cash flow? Or perhaps you’re using an approach that I didn’t cover? What steps are you taking to improve your cash flow?
14 Responses to “Tracking and Managing Your Cash Flow”
GNUcash is another tool one can use to track his/her finances and networth. I have been using it for 3 years now. Really satisfied. One can track expenses/ income and analyze using various reports. It also has support to import data from other tools like Quicken. Above all it is free.
The only receipts that I care about now are the ones marked FSA/HSA, as they are saved for tax purposes. I track those items very specifically in a dedicated spreadsheet so I can pay myself back from my HSA account (my HSA still owes me..), and keep my tax-records straight.
A few years ago we were on the cash-envelope system to retrain our brains to not waste so much money on ‘stuff’. I recommend this to anyone stressing out from a cash-flow problem. But once we paid off our debts (excluding house), there was no point in trying to track things so relentlessly.
The beauty of the > $0.00 (plus buffer) method is that you are free to spend extra money on for whatever you want. If the wife wants to blow $500 on hats, then she knows that we will have less money for other things, like entertainment, groceries, etc. Trying to religiously budget $13.65/week for clothing was not a method that was going to work for her, and she was always ‘stealing’ money from envelopes and dropping IOUs into them (creative accounting!).
So much less stress now, no more arguing about petty purchases, etc. I do look at all transactions, but I rarely question them unless it is from a merchant that I don’t know — it’s the system we have and it works for us.
I don’t know if it would help you – “just try not to go there” is a pretty good method – but I pretty much rolled categories together. I buy soap, detergent, toothpaste, shampoo, toilet paper, and face cream at our coop, so it’s “groceries”. We get lightbulbs at Target so they end up under “clothes”.
The only times I split receipts is if I’m looking at a certain item – like “how much are spending on toys” means I have to go back and split the Target receipts. Or if we’re feeling like some item is too big (“groceries”) and I need to tighten it up, I take a look at what exactly is in there.
(My method is receipts in envelopes in a file drawer, and an Excel spreadsheet.)
BG) Although adding walmart as a budget item, we don’t go there very much. Then there is Target and Big Lots and so on. Each one has a strange mix of products that are either one time purchases. In short, we just try not to go there except for special purchases (that electronics sale item, etc.)
I like to categorize based on the type of items, not where we go.
However, I will consider your >= 0.0 method a bit more. I have debated on setting up another debit card and account just for the ‘slush’ account we spend each month and just lump all the rest here. That way I have an account with a >= $0.00 (plus buffer) setup.
We’ve used YNAB for over two years and I really like it.
I don’t use it quite the way they recommend (building a buffer in your account, etc.), so sometimes that causes frustrations, but that’s not so much a problem with the program as it is a problem of me not using it the way it was designed.
Really nice article. I was just looking at many of these software packages.
LesInk) The solution — just add a WalMart entry to your budget. Do you really care that you spent an extra 3% on milk this month compared to the same month last year?
My budgeting system is now down to:
Checking Account Balance >= $0.00
That’s all I care about really. My savings are automated, my bills are mostly automated, everything else can be spent on whatever ‘stuff’ my wife wants to buy.
Use a spreadsheet, and budget how you want…
I have done Quicken, Excel, and even a bit of an online tool provided by my bank (not listed above). In short, I can say the biggest time drain is the ‘Walmart effect’. That’s when you got to split a charge by hand at some point. I don’t expect any of the tools to be able to do this because it is just plain hard to categorize many charges.
In short, they all fail at some level. For example, I have not found a good budget tool that I like (I can’t seem to figure out what Quicken thinks it is doing to budget — its so far removed from an envelope system). So, I’ve adopted a hybrid technique. I use Quicken to download my statement, use its automatic renaming rules to do most of the categorizing (but check it closely), while using a spreadsheet to track my budget. Very tedious.
In the old days we didn’t have computers or the internet. We did budgeting by the seat of our pants. Even though I’ve been using a computer to track income, expenses, and investments for nearly 25 years, it has only been within the last 10 years that I have actually used the “budget” feature in Quicken. Having years of history has been helpful in that process. Regardless of the method, the important thing is to live within one’s means. If you are buying new gadgets and taking expensive vacations while still paying credit card interest, you are not paying attention.
Thanks for sharing your thoughts.Our financial system is constantly being updated and tweaked as we grow and learn about different options.
I like the idea behind Mint, but I find the categorization process tedious. I spend way too much time going through and categorizing stuff. And essentially have to do it twice, b/c I then do the same thing in Quicken.
I’m just not willing to trust Mint with all of that data, and then one day find out they’ve decided to charge me for it…
Switched over to Excel this January after years with Quicken. I like the ease of Quicken, but Excel works across platforms and doesn’t have to be expensively updated every time you turn around. And though Mint.com sounds neat, as a survivor of the Pleistocene I’m just not very comfortable about putting that data in the Cloud.
You can split purchases into different categories on Mint (grocery vs. personal care vs. electronics etc.), but you have to do it manually.
Mint.com’s good, but still needs time to work it’s account fetching system out. A number of major banks aren’t listed or don’t work with all accounts. It’ll probably get up to snuff in a few months, but not having a few major loans or savings accounts really kills the functionality for some people.