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5 Steps to Automate Your Cash Flow

5 Steps to Automate Your Cash Flow

One of the most underrated elements of personal finance is behavioral in nature. Being human, we are emotional beings. While not a bad thing, it can lead us to make some poor financial decisions. Our financial decision-making processes, influenced by a mix of logic and emotion, can be structured to reduce the temptation to spend spontaneously.

A few years ago, I designed and implemented the following cash flow management process as part of my own financial plan. I’ve been extremely happy with how easily I’ve been able to reach some of my life goals and objectives by reducing the influence my emotions have on my financial decisions. I have a feeling that this cash management system will help you too.

1. Calculate and Categorize Expenses

The first step of any financial analysis and system design endeavor is to gather the relevant data. In this case, you will want to start by determining your monthly expenses and pooling them into different types or categories.

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One of the best ways to categorize your expenses is to lump all of your monthly household bills in one category and discretionary expenses in another. To accomplish this, you should take your mortgage, phone, utilities (water and electricity), and internet bill and determine what you pay for all of those expenses in an average month. Next, total how much you spent on coffee, clothing, food, gas, and any other day-to-day expenses on a monthly basis.

Once you have calculated your “fixed” monthly costs, you should make the decision to use what’s left over to invest, pay down debt, and accomplish your life goals.

2. Plan for Savings and Investments

With the understanding that life can throw some unexpected (and sometimes expensive) events at you, think about having a safety fund. Your safety fund should be denominated in cash and equal to three to six months worth of your total cash outflows. I’ve found that the best way to fund a safety net is by placing a few hundred dollars in a savings account every month.

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Once your safety net is completely funded, it would be wise to keep funding the account with the same amount of cash. This will allow you to save the additional cash needed to make additional payments on your mortgage principal. You can also decide to use the additional savings to fund an IRA or other tax advantaged investment account as well.

3. Create Separate Bank Accounts

To reduce the temptation to spend the money that you would rather save and invest, you can utilize a couple of separate bank accounts for each expense category. With this in mind, open a checking account with your mortgage lender and use that account to pay all of your household bills (mortgage, phone, utilities, etc.). This account can also be used to store your safety funds and additional savings.

Additionally, the income that is left over after funding your “household account” can be sent to a “day-to-day expense” checking account. This way, your income allotments match your expenses and you have built an automatic cash flow system.

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4. Use Direct Deposit and Automatic Allotments

In order to eliminate the burden of having to manually transfer funds between your various bank accounts, you can take advantage of direct deposit, automatic allotments and your bank’s online bill payment system. These tools will allow to reduce the time it takes to manage your personal finances.

To accomplish this task, estimate how much money you will need to send to your household account every month. Remember that you will need enough to pay your monthly expenses and still have some left over for your safety fund. Once the estimate is complete, set up an allotment to transfer half of those funds to your household bank account each paycheck.

The remaining funds (left over after the household expense allotment) should be deposited into your “everyday” expense account. These funds can be used to purchase food, clothes, gas and any other personal items that you might want.

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5. Implement and Monitor Your Progress

Once you have all of these pieces lined up (amounts determined, bank accounts opened and allotments made), all that is left to do is implement and monitor your new cash flow system. The best part about making the decision to automate your cash flow is that it reduces the temptation (usually emotional in nature) to break your budget.

A few months after implementation, you might notice that you have over or under-estimated how much you need for the various expense categories. Whichever the case, you will need to make adjustments to your allotments and/or your purchasing behavior.

Keep in mind that a great cash flow management system is worthless if it’s not implemented. The most important part in the financial planning process is putting in the work and taking action.

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Last Updated on July 20, 2021

Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

Break Free of Your Finances

Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

Though it seems hard to believe, it is really very simple to get financial freedom.

To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

1. Stop Unnecessary Spending

We often spend money inwardly, instead of objectively.

For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

To stop this habitual spending, log down all your spending over the course of a month.

Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

2. Plan a Monthly Budget

This is a great opportunity to get serious.

Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

3. Cut-up Credit Cards

Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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If not, you may want to consider ridding your life of the burden that credit cards bring.

Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

4. Increase Savings

There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

It’s good practice to save up to 15% of your income.

Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

5. Invest Wisely

Consider investing in funds.

Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

6. Invest in Gold

There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

Another way to invest in gold is through ETFs (Exchange Traded Funds).

These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

7. Stash Emergency Funds

Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

Make it hard to get your cash.

Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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8. Find Fabulous Mentors

Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

9. Be Extra Patient

Patience is the key of financial success.

Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

Financial Freedom for All

Anyone can achieve financial freedom, regardless of their financial circumstance.

Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

Featured photo credit: rawpixel via unsplash.com

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Reference

[1] Hartford Gold Group: IRA Retirement Accounts

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