Budgeting and Cash Flow: The Cornerstones of Planning

Financial plans often fail before they have been given a real chance to succeed.  A realistic budget, grounded in your actual cash flow, is the foundation of any successful financial plan.  While you may not like the realities an updated budget shows, the only way to create a clear path to your goals is through making adjustments to your budget.

Creating a budget can feel overwhelming.  Maybe you don’t want to see how much you spend on discretionary items.  If you want to establish realistic, attainable goals, you need a functioning budget to get you there.  Your goals need to be a line item in your budget, not just something you hope happens to you!

Cash flow drives your ability to create wealth.  Investment planning and tax strategy matter, but without consistent surplus, wealth cannot compound.  The surplus allows consistency, compounding, and gives flexibility when life hits you with its many what-ifs!

The tools matter less than the system. Find a tracking method you’ll actually use.  There are plenty of tools out there to help you manage your budget, track spending, and give you the reports you need to create good financial habits. 

Get your expenses into three buckets: Fixed, variable, and discretionary.  Fixed expenses are things like mortgage, auto, insurance, savings (emergency and retirement).  Variable expenses are like utilities, groceries.  Discretionary expenses are things like eating out, entertainment, gifts, vacations.  Some discretionary expenses may feel nonnegotiable — that’s fine. Plan for them intentionally. What matters is knowing where flexibility exists when adjustments are needed. 

To help set up some guardrails, you can use these ratios to look at your expenses.  Using percentages allows your budget to flex as your income grows.  Start with your total debt, housing and consumer debt combined, with a target of no more than 36% of gross income.   Breaking down total debt, housing costs should max out at 28%  and consumer debt around 10-15%.  Your savings rate should be at a minimum of 15% depending on your starting point and goals.  If you have a big purchase or planning an early retirement, your savings rate should be at least 20%.

These are not hard lines to draw in the sand, they are guidance.  And like any budget decision, you have to start looking at priorities for you and your family, and where do you minimize expenses in some areas to do more in other areas.  Budgeting is not separate from financial planning, it is part of the process. Because planning is personal.

In our process, we don’t start with investment returns. We start with cash flow. Every projection, recommendation, and strategy depends on it. Once we understand how money moves through your life, we can build a plan aligned with where you want to go.

How do you plan for big purchases?  Especially when we will tell you that you shouldn’t touch your retirement savings. Retirement savings are just for retirement.  These take the longest to grow to present real value later in life, we have to protect them from ourselves.  A big purchase is when you need to find ways inside of your budget to create a surplus. If the goal is within the next 3–5 years, consider setting up a separate account designed for stability rather than growth.  Some options are high-yield savings account, CD, or money market equivalents that can earn more than both of those, but still safe and liquid.  Your time horizon will also play a role in which type of account you choose. 

A budget does not have to be restrictive, it just needs to add clarity to how money moves in and out of your life.  Without that, you cannot create clear process that will put you on a path to your goals. Goals aren’t accomplished by assuming where your money is going, they’re accomplished by knowing.  You should revisit your budget at least annually, or when any major changes in your circumstances occur. 

If you don’t currently have a system to track and review your spending, we offer complimentary access to our eMoney budgeting tool. It’s the same tool we use in our planning process. Email me and we’ll get you started.