February is time for cash flow planning!
Cash Flow Planning
February is a very opportune time when it comes to planning your cash flow. The holidays and new year have passed, but it’s not yet time when people start feeling overwhelmed by tax season. In this “in between” time, take a few moments this month and plan out your cash flows for the year.
Cash flow planning?
It’s natural to ask, what is cash flow planning? We don’t like to use the word “budget”, because this type of planning isn’t meant to limit you! Instead, it is the process of creating clarity about how cash will be flowing in your personal or business finances, and how you plan to spend it. It’s important to do because it helps you make sure you’ll always have enough cash available to meet your daily living needs as well as unexpected events that may come up. Items forecasted in a cash flow spending plan include anticipated cash inflows and cash outflows.
By having more of a vision of what your future cash flow looks like, you’ll feel more at ease about paying for things. In addition to reducing anxiety over money, cash flow planning will also help you reduce the amount of time spent addressing mishaps that come up. These can cost time and even may lead to overdrafts or other fees.
If cash flow planning is so critical, then why don’t more people do it? Admit it, the thought of dragging out those spreadsheets and sifting through months and months of statements and data isn’t the most appealing one in the world. The good news is that online tools have made it easier to analyze this information quickly and without a large administrative burden.
Online cash flow planning tools
The eMoney financial dashboard we offer has robust cash flow planning tools, and has recently enhanced capabilities for phone and tablet users. You’ll be able to use this tool to see your transactions in aggregate. You can filter to see which transactions will take effect on any particular date or date range. You’ll also be able to see all transactions in a particular category such as:
Auto & transport
Bills
Business
Cash/ATM
Charity
Education
Entertainment
Fees & Charges
Food
Gifts
Health & Fitness
Home
Income
The spending portion of this dashboard is optimized for mobile users; it won’t be awkward to search or set up roles for cash inflows and outflows on your phone.
Financial Dashboard security
Many people bristle at the thought of connecting their checking and credit card accounts to an online tool. Fortunately, eMoney has robust data security in place. They use a multi-layer approach and are equipped to deal with any potential vulnerabilities that may arise. For more information on eMoney’s data security measures, please read here.
Putting a cash flow planning process in place
People frequently ask if just using their year-end credit card statement as a method of cash flow tracking is enough. While the data contained in this report is valuable, it can by no means replace a full examination of your monthly cash inflows and outflows, month by month. Even the most committed credit card user still has deposits and withdrawals related to other accounts; thus, using a tool that can capture all the flows makes the most sense.
The next question is invariably, how much time is required to create an adequate cash flow spending plan? Very basic tracking takes some time to learn in the beginning. Most likely you will have to learn how to use some sort of system (e.g. eMoney), but after this, time required should be minimal. Our clients tend to spend an hour or two a month, at maximum.
How long do you need to keep tracking things? You’ll get the most benefit doing this for nine to 12 months. As long as you can estimate expenses that come once or twice a year (like eye exams or life insurance payments), you can get a lot of benefit tracking expenses for 2-3 months on a proactive basis. This will be the most useful scenario as it would allow you to plan your future expenses out for a couple of months or even a full year, instead of just looking back at how you spent.
Looking to start cash flow planning this February? Contact us with your questions or thoughts.
Contributor
Chris Jaccard, CFP®, CFA is a lead advisor with Financial Alternatives in La Jolla, CA. When he’s not working on home improvement projects or trying to keep up with his kids, he loves to help successful families consider their alternatives and make better financial choices with the EXPERT™ Advisory Process. Schedule a time to chat about your situation or the latest project.