Mastering Your Budget Week 3 - Control your cash flow
This is the most crucial step in the mastering your budget program. Without the money flowing in the correct direction you lose the benefits of the system. In the previous weeks you setup a checking account and identified your planned expenses. This week you will get that money flowing in the correct direction.
The cash flow is the path your money follows. Think of it like a river. The money comes from a source (your employer), flows into a bank account (direct depost), then seperates and branches out to cover your expenses (bills / purchases) and investments (savings).
This weeks assignment is to optimize your system. Block all the holes where money is leaking out. When the system is initially setup, it’s easy to say “I’ll just cover this bill out of my personal account”, or “I already have my direct deposit going in my personal account, I’ll just transfer the money over.”
Rules of the cash flow:
- Income is deposited in the planned expenses account.
- All planned expenses are being paid from the planned expenses account. There are no planned expenses paid from your personal account.
- All living expenses are being paid from the personal expenses account. There are no living expenses paid from your planned account
- Money only flows one direction from your planned into your personal, no upstream transactions (no temporary loans).
- You are living within your means. The money that is accounted for in the planned expenses stays there because it needs to pay bills.
Your budget system must be tempered. You are trusting it to be a representative of your finances. When your system is defined, you can trust it. The goal is to think about your budget system once, when you set it up, and then let it run smoothly without your interference. You will be auditting your accounts on a regular basis for errors and theft, but this is another topic.
Action Items
- Label your debit cards “personal” and “planned”. When you pull it out of your wallet you will ask yourself, is this a personal or a planned expense.
- Start depositing your paychecks into your planned account. If you have direct deposit, set this up.
- Verify that your autodebits / billpay and any online payment options are setup to use your planned expenses account.
- Review your planned account and make sure all of your planned expenses are coming out of this account.
- Review your personal account history and make sure you are not using it for any planned expenses.
- After you’ve completed all the above steps, draw a picture of the flow of your cash flow. Make sure it flows from income to planned to personal/bills/invest.
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