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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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5 Steps to Automate Your Cash Flow A Couple of Awesome Retirement Planning Tools

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Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

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Featured photo credit: Austin Distel via unsplash.com

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