Before You Begin: Mastering Your Cash Flow

Setting and implementing financial goals automatically can be a helpful strategy for managing your financial life. Since you make a plan in advance, your day-to-day financial behaviors will be better aligned with your actual goals, not the dozens of financial distractions we encounter every day.

But first, it’s crucial to understand your current cash flow accurately. That is, how much money is coming in each month and how much is going out. It’s like checking the depth of a pool before you dive in. Only then can you allocate your automatic payments and transfers without the risk of accidentally overdrawing your checking account.

Budget and Cash Flow Analysis

Unless you already maintain a monthly budget, one of the risks of automation is underestimating your actual spending – thus overestimating how much you can dedicate to automatic payments.

If you don’t already maintain a budget, this website offers a budgeting course and tools to set up a monthly budget and track your monthly spending.

Another approach is downloading your checking and credit card account transactions for the past few months. For each month:

• Export your transactions to a spreadsheet.
• Sort the transactions by name. For checks, consult your checkbook register or account statement to identify each check and update the name to reflect the payee.
• Cut the deposits from the list and paste them into a new sheet.
• Cut the fixed expense payments and paste them into a new sheet. Examples include loan payments, rent, mortgage, and insurance payments that are the same every month.
• Review the remaining transactions for required expenses that vary, such as utility bills, gas, and groceries. Paste them into a new sheet.
• Use the auto-sum tool to total the amount column for each sheet.

You’ll then have a rough idea of your income, essential fixed expenses, essential variable expenses, and nonessential discretionary spending. Remember, spending (and even income for some) can vary monthly – unexpected bills, vacations, and holiday gifts can be unpredictable. So, tracking your spending over time is important to understand your cash flow best.

Increasing Cash Flow

For those new to monthly budgeting, aligning your spending with your goals is key to reaching your financial goals. By cutting unnecessary spending, more money can be freed up for savings, paying down debt, or any other financial goal.

Suppose you used the spreadsheet method outlined above. In that case, the nonessential discretionary spending list is an excellent place to search for ways to save. Cutting back on convenience eating, dinners out, and unplanned shopping is a great place to start. Moving on to your other spending categories, you may find that some expenses – like cable TV and subscriptions – aren’t being used and could be canceled (or paused) to free up cash. For example, if you have multiple streaming services, you can pause the ones you use the least and rotate through them every few months – potentially saving hundreds of dollars per year without giving everything up.

And for expenses you need to keep, it may be possible to save by comparison shopping or changing service providers. Cable television bills often start at a low promotional rate and then increase, sometimes dramatically, over the years. Sometimes, even calling your cable company and telling them you’re considering a change will reduce your bill. You can also comparison shop for services like auto insurance and explore “similar but less expensive” options for just about anything you buy.

Finally, suppose you review your spending and find fees for late payments, overdrawn accounts, or even out-of-network ATM usage. In that case, it’s crucial to understand why you were charged the fees and investigate how to avoid similar fees going forward.

The Linked Savings Strategy

Even with a solid understanding of your cash flow, it’s possible to be caught off guard by higher-than-normal spending. Consider linking your checking and savings accounts to minimize fees associated with overdrawing your checking account. That way, if you spend more than expected, money will be automatically transferred from savings to cover the difference.

To use this approach, contact your bank or credit union. And remember, linked savings is just a backup plan. Be sure to understand any fees and limits on the number of transfers per month.

The Takeaway

Setting up automatic payments without understanding and actively managing your monthly budget can be risky. So, if you don’t already budget your money, consider setting up a budget and tracking your spending for at least a couple of months before taking steps to automate your financial life.

Once you are confident with predicting your monthly cash flow, you can continue to explore options for automating your way to your financial goals.