Creating a Cash Flow System
Do you often wonder where your money went by the end of the month? Is it tough to put aside savings, or do unexpected expenses keep throwing your budget off track?
Many people face this challenge, and without a solid grip on your cash flow — knowing where your money comes from and where it goes — you risk losing control of your financial future. This can lead to missed opportunities, unnecessary stress, and a cycle of living paycheck to paycheck.
Effective cash flow management isn't just for those struggling with money; it's a valuable skill for everyone, from young professionals to growing families.
As we try to learn the ropes on how to improve your cash flow management, it's important to remember that small, consistent changes can lead to significant improvements over time. Whether it's cutting back on unnecessary expenses, finding ways to increase income, or regularly reviewing your financial situation, these steps can have a lasting impact.
How Cash Flow Works: Inflows and Outflows
Understanding cash flow involves knowing all the money coming into your account (inflows) and all the money going out (outflows). Inflows primarily include your salary, any side hustle earnings, dividends from investments, and other sources of income like government benefits. By accurately assessing your inflows, you can get a clear picture of your financial capacity and plan accordingly.
Outflows, on the other hand, encompass all your expenses. This includes fixed expenses like rent or mortgage payments, utilities, insurance premiums, and variable expenses like groceries, entertainment, and dining out.
It’s also important to account for occasional but significant expenses such as car repairs or medical bills. The key to managing cash flow effectively is to have a detailed understanding of these outflows so you can track and control your spending.
Creating a Cashflow System That Works for You
Creating a cashflow system begins with listing all your income sources and expenses. Start by writing down your regular monthly income and then list your fixed and variable expenses. To ensure accuracy, consider reviewing your bank statements or using budgeting apps that categorise and track your spending automatically. This will help you capture all your expenditures, even those small, easily overlooked ones.
Once you have a clear view of your finances, decide on a budgeting method that suits your lifestyle. One popular approach is the 50/30/20 rule, where 50% of your income goes to needs, 30% to wants, and 20% to savings and debt repayment.
A method we use for our clients is implementing a cash hub system, where we automate a certain amount of money to different accounts and only spend what’s in each account.
Five foundational accounts are:
Spending: This account is dedicated to your wants, covering non-essential expenses like dining out, entertainment and shopping. This allows you to spend the money in this account guilt-free knowing that you aren’t taking away from your future plans.
Savings: This account is used to build your savings to help fund your long-term goals and future purchases
Living: This account covers your essential living expenses, such as groceries, utilities, and transportation.
Bills: This account is dedicated to your fixed expenses like rent, mortgage payments, and insurance premiums. It ensures you have the funds to cover your recurring obligations and avoid late fees or missed payments.
Emergency: This account is for all the urgent and unexpected expenses that life throws your way. Think home and car repairs as well as medical expenses. It provides a financial safety net for your family, so you don’t have to take money away from your future or goals.
While these four are just the foundations of a cash hub, you can add in more accounts that are tailored to your goals like having a separate account for holidays, investments, salary sacrificing and more.
Creating a cashflow system helps you live within your means and empowers you to set and achieve financial goals. Remember, the goal is to create a realistic cash flow structure that reflects your lifestyle and helps you make financial decisions in line with your goals.
Strategies to Improve Your Cash Flow
Improving your cash flow involves both increasing your income and managing your expenses wisely. One effective strategy is to explore additional income streams. This could mean taking on a side job, selling unwanted items, or investing in income-generating assets like stocks or rental properties. Offset accounts can also significantly boost cash flow by reducing the interest you pay on your mortgage, effectively saving you money that can be redirected elsewhere.
On the expense side, identify areas where you can cut costs. Look for recurring subscriptions or memberships you no longer use, compare insurance policies for better rates, and shop around for better utility deals.
Salary sacrificing is another strategy that can help improve cash flow, especially if your employer offers benefits like superannuation contributions from your pre-tax salary. This not only reduces your taxable income but can also help you build your retirement savings faster. Learn more about salary sacrificing here.
Monitoring and Adjusting Your Cash Flow Plan
Regularly monitoring and adjusting your cash flow plan is crucial for long-term financial success. Start by setting a weekly or monthly review schedule to track your spending and income. Use budgeting apps or spreadsheets to keep an eye on how closely you’re following your cashflow plan. This ongoing review process allows you to spot any discrepancies and make necessary adjustments before they become larger issues.
Adjusting your cash flow plan means being flexible and adapting to changes in your financial situation. For example, if you receive a salary increase, decide whether to allocate the extra funds towards debt repayment, savings, or investments.
Conversely, if your expenses increase unexpectedly, look at areas where you can cut back. The aim is to ensure your cash flow remains positive and aligned with your financial goals.
Remember, improving financial literacy through tools and resources can further empower you to make smarter, well-informed decisions about your money.
About the Author
John Cachia is a seasoned financial adviser and dedicated parent of three boys. With a passion for financial literacy and wealth management, John has been in the industry since the young age of 14. His early start in finance has provided him with a wealth of experience and insight, which he now uses to guide families towards achieving their financial goals. As Australia's leading wealth adviser for young families, John is committed to helping parents become positive financial role models for their children, ensuring a secure and prosperous future for the next generation.