The Big Bad B-Word

Most newbies refer to a personal cash flow plan as a budget. The big bad B-word. This is why I started calling it our monthly cash flow plan (although I sometimes slip and still call it our budget). In any event, the family (or personal) cash flow plan (a.k.a., the budget) is the best tool to get off the paycheck-to-paycheck merry-go-round.

How to Create a Personal Cash Flow Plan

You can download this spreadsheet to get started with your personal cash flow plan. I used this in the beginning. One of these days, I have to make a YouTube of my actual cash flow planning system which include a monthly statement of net worth and my Rothe IRA asset allocation.

But first let’s talk about the different parts of our personal cash flow plan.

Gross Income and Net Income

While we record our gross incomes, it’s the net income figure that’s important. That’s the actual money we have to work with, so the percentages below should be based on it.

Next grab your bills, checkbook, and a calendar!

Expenses – Needs versus Wants and the 50/30/20 Rule

Needs – Four Walls (50%)

The four walls are basic survival needs. They are shelter & utilities, clothing, food, and transportation. No matter what, we want to include these in our cash flow plan. We need a place to sleep, clothes to wear, food to eat, a car to get to work, heat, water, telephone and Internet, etc. These are all needs

The 50/30/20 Rule is not just easy for beginners, my wife and I still use it. Even HNWIs and HENRYs use some form of budget, but the percentages may be different or more segmented. (HNWI = high net worth individual; HENRY = high earner, not rich yet)

So the 50/30/20 Rule aims to use 50% of our net income on the four walls. This is where the percentages on the digital budget come into play. We were initially surprised at the total percentage we spent on the four walls. It was much higher than we expected. So we become a one-car family instead of a two-car family. We have two cars now, but back in 2008, we were dead set on getting of the paycheck-to-paycheck merry-go-round.

Wants (30%)

We spend 30% of our net income on wants. Dinners out or a weekend getaway are totally allowed if they fit into this part our cash flow plan.

Thirty percent may seem to be on the high side, but inflation may now be chewing through this in a hurry depending on a person’s net income. We are blessed to have decent-sized “shovels” as a result of our educations and hard work.

Savings (20%)

The 20% part we save for retirement. But when we still had consumer debt (e.g., credit cards, student loans, car loans, etc.), we knocked those out first. Everyone should take care of these before even before finishing a full emergency fund or starting investing. We even put some of our 30% toward debts until they are gone. Pay off everything but your home.

NOTE: Investing should start even when you have consumer debt if your employer offers a matching 401k or 403b. In that case, take the free money. A 50%-100% match more than offsets even the highest of credit card rates. But still put as much as you can squeeze into cleaning up credit cards and such.

Simplest boring investments are the best. We index funds like VTSAX and FSKAX – total stock market index funds. It’s not very sophisticated, but professional money managers don’t typically beat the market. And they’ll charge a 1% fee for the pleasure. Meanwhile VTSAX has an expense rate of 0.04%. You don’t want to pay 25 times as much for people who can’t beat the market.

Zero-based Budgeting

This means to spend every dollar of income on paper at the beginning of the month. Income minus outgo should equal zero. Remember that 20% of the outgo will eventually be investing. Along with our digital cash flow plan, we use what we affectionately call our “black book.” This is nothing more than a composition notebook. Based on our digital cash flow plan, we know exactly how much we can spend each week. If we spend less during a given quarter, we put the extra into our M1 Finance portfolio.

Some people use the envelope system. Dave Ramsey advocates this. It entails using your cash flow plan and putting cash into various envelopes marked FOOD, CLOTHING, etc. that are not in your digital cash flow plan. We don’t do the envelope system, because we don’t like the idea of carrying cash around.

So What’s the Calendar For?

Each year, I go to timeanddate.com to print off a free 12-page calendar, one for each month. This is where I write recurring monthly expenses and other bills. While most of our bills self-pay automatically, we still keep track of them on the calendar. The ones that I manually pay (either online or in-person) won’t be forgotten, because they are on our calendar. From the calendar, it goes into our digital cash flow plan.

Using the calendar, we keep track of expenses in our digital cash flow plan, as well as dues dates of credit card bills. We use credit cards like cash, paying them off in full (automatically).We use the “black book” to list our cash flow items that are not in the Excel worksheet. We keep a running total, so we know when to quit spending (based on the cash flow plan).

Conclusion

Using these tactics is how we got off the paycheck-to-paycheck merry-go-round.

As Always…

Thanks for reading! I hope this information provides food for thought. Remember that I am not a certified financial planner, a certified public accountant, a licensed real estate agent, etc. My content is for educational purposes. I am a math educator who happens to have a finance degree. Like they say, never take financial advice from a math teacher! (Do they really say that?)

But you should spend less than you earn, invest the difference, and stay out of debt!

I would so appreciate your sharing my content with anyone you feel could benefit. And if you would like a free exploratory conversation or just want to shoot the breeze about personal finances, call me and leave a message or send a text to 570-731-0425.