A while back, I wrote a post about The Five Stages of Budgeting Grief. In it, I confessed that I don't really budget. That may leave some of you to think that I don't manage my money well, and wonder how the heck I can call myself a financial planner.
The secret is that I LOVE cash flow. I REALLY love cash flow. I love spreadsheets, I love charts, I love forecasting. I love it so much, that I don't HAVE to budget (even though you could argue that I should).
My definition of budgeting is something you have to do if you're not managing and forecasting your cash flow well. There is so much more joy and peace in managing cash flow, rather than budgeting, that I wanted to devote an entire blog post to it.
So What's the Difference?
Here's what I mean when I talk about cash flow. It's a measure of your monthly money temperature that tells you whether you are on track with your financial goals. If you have positive cash flow, you are more likely to be able to fund future goals. If you have negative cash flow, you may need to make significant life changes or dig down and really budget.
You have your take home pay - that's what gets put in your checking account after taxes, benefits, retirement contributions, etc, and any other income that comes in. Then you have your expenses - some being steady like rent or a mortgage, some that are more lumpy like life and auto insurance, home improvements, or vacations. Once you subtract expenses from income, you know whether you're negative or positive each month.
If you just stop there, it sounds an awful lot like budgeting at a high level. The real power of cash flow comes in when you forecast out what it looks like for the next 12-18 months. Then you can truly know if this month is an anomaly, or a sign of bigger problems to come. You can plan for lumpy expenses and have a buffer of cash to cover them. You can spend more time thinking about your goals and your future, and less about whether you spent too much this month eating out.
The Power of the Forecast
There are a lot of personal financial management options out there like Mint.com and YNAB (You Need a Budget). Mint focuses mostly on the past, while budgeting software focuses on the present. Cash flow forecasting focuses on how your present is potentially affecting your future. It looks forward to anticipate issues and opportunities and give you peace of mind today.
For example, when I work with clients who have positive cash flow, we talk about how they can increase savings to reach future goals, increase spending to enjoy life more now, or do nothing because the excess will be needed in future months.
When a client has negative cash flow, we discuss whether it's temporary, ongoing, indicative of a need to increase income, or does it require a deeper look at their lifestyle and a need to budget closely to get back on track.
Where the Joy Comes In
For me the joy is that I worry less about what is happening today because I see the light at the end of the tunnel with things like daycare costs and losses on my rental property. I feel like I'm making progress. I don't have to manage cash every day because I know I have a buffer in place to handle unexpected expenses. I know when those lumpy expenses will be happening so I don't worry about a month or two of negative cash flow.
I can help you find your cash flow joy. It's the perfect topic for a Quick Start session. In just a few hours of work together, we can customize my cash flow forecasting system to your particular situation and give you tips to increase your peace of mind. Please just reach out. Take the first step!