If you can promise to eat a salad and chicken breast every night for dinner, and stick to it month after month, you can probably keep a budget. But if you get invited to dinner, go to parties, and have emotional breakdowns that require chocolate pudding cups for supper, your budget’s as good as a diet on a desert island.
Life changes course. If you don’t have a financial system that accounts for the changes, you go off the budget just like you go off a diet. Getting real about personal finances means making a dynamic plan that flexes with life. Enter the cash flow projection. Allow me to illuminate the difference:
A budget is a static set of numbers that reflects your current costs of living. It is based on your history and represents expenses in your life at present. Unfortunately, the budget is where most people stop the money conversation.
A cash flow projection implies something that is dynamic or moving. It allows you to breathe life into your budget by viewing it in relation to your future, ideally twelve months’ worth. Because it accounts for future expenses, it moves with life changes. It is an ever-current, interactive picture of your money that changes as your circumstance changes month to month, always moving forward.
Make Your Cash Flow Projection Work
Here are a few tips that help keep the CFP at the top of its game.
1. Sixty minutes, Thirty Days
Find an hour once a month to check in with your CFP and make sure the numbers match your current life picture. Relate your calendar to your projection. Is the property tax bill in May’s projection? Is the trip to Hawaii in October’s?
2. Check for Accuracy
- Are the numbers you calculated for your expense categories accurate?
- Are you spending $600/month on groceries instead of the $500 you set aside? Change the projection.
- Did you pad for security, and spend less than you expected on the birthdays and wedding parties in June? Change the projection to show it.
3. Make It Fit
When the projected numbers remain the same, I like to look at the bottom line. Is my net cash flow is negative? By how much is it negative and how do I want to go about changing that? I also like to allocate every dollar to an expense category, whether I’m saving for retirement or putting money aside for a vacation goal. So I ask the same question if the net cash flow is positive. By how much is it positive and how to I want to re-allocate?
4. Look at the End of the Year
If I have this net cash flow on a monthly basis, what will that look like at twelve months?
Most people will see a small negative each month and think, “We can make this up if it’s short.” But when you look at the end of the year and see it has added up to a $3200 deficit, you begin to see the reality of your money picture.
5. Make Sure Your Net Cash Flow Is Slightly North or South of Zero Every Month
It’s hard to make up a $3,000 deficit at the end of the year. Handle it incrementally month by month by reallocating your expense categories. A zero net cash flow, or close to it, means you have accounted for every dollar.
6. Track a To-Do List
While putting numbers in my CFP, the whole time I’m tracking a to-do list. Most people when they have this kind of brainstorming they think of a thousand things they want to be doing differently, to meet their monthly and yearly goals:
- Shop at Trader Joe’s to spend less on groceries
- Share babysitter twice a month
Track your to-do list and turn the ideas into action items, so that at end of session you’re left with an action list of steps to take to be on track financially.
7. Set Timelines
Decide by when you are going to complete the action items you’ve listed in Step Six. Then get going on them! Set a date and time for your next sit-down with your CFP.
The cash flow projection interacts with so many parts of our lives that it touches on multiple ways we learn and remember. It makes a radical difference in understanding a financial picture—from a budget with static numbers you never remember, to a recognition of how life and corresponding financial changes look and feel as they occur.
If you can commit to the nightly salad and chicken breast without feeling a loss, stick with a static budget. But if you’re like most, life changes things up. Try slipping into a CFP. It offers a more integrated way of living with financial awareness.
Originally published on Green Sherpa