First you must master the nearest term inflow of cash—the next 30 days (or 4 to 5 weeks if paid on a weekly or bi-weekly orientation). Every dollar in the next 30 days should have a fresh unique assignment for that period. Assuming it’s “about the same every month” will erode your financial discipline and visibility. It starts with structuring a budget that strikes a balance between simplistic and sophistication. The budget framework should provide macro-categories– for consumption (recurring bills, debt service, discretionary spending, and non-recurring annual expenses) and traction (savings, investments, debt payoff)–and sufficient detail to customize the framework subcategories for your individual needs. In addition, there should be a built-in flexibility and a clear integration point with your real-time bank balance to insure that adjustments with in the period can be made as necessary.
After mastering your recurring 30 day milestone, you then stretch your view to the next rolling 12 months and capture/quantify the expenses that you can see coming in that timeframe that do not recur on a monthly basis—such as known auto and home repairs and maintenance, household overhead, taxes, insurance, annual fees, travel expenses, vacations, gifts, tuition, pet expenses, etc. The system should help you efficiently manage the anticipated expenses by setting up proper reserves and transfers between accounts without having to juggle large amounts of cash or raiding your other liquid reserves for emergencies or retirement. The annual budget totals by category should be refreshed continuously every 30 days since the succeeding 12 months may require refinement and recalculation as life changes pertaining to these annual categories may also change.
The next level of cash flow management is absolutely essential for avoiding future debt. After all consumer debt is initially retired and the cash safety net is completed, a well-defined capital expenditure budget should be set in motion to fund the assets that need to be acquired or replaced within the next rolling five years (e.g., cars, home improvements, depreciable big-ticket purchases). Not only is this smart for avoiding financial regression, but setting up a self-funded line of credit for these purchases will insure your retirement or other long-term plan objectives won’t be disrupted or placed on hold. Like the annual expense categories, this budget is also ongoing, recurring and refreshed regularly to maintain the integrity of the long term plan.