Mastering Cash Flow: The Key to Financial Success

“Budgeting. Just the thought of that word can elicit groans and shudders. Yes, there are those out there who love typing every expenditure into their spreadsheets or personal finance software programs, who gleefully save every receipt from every purchase, and who enjoy doing this every day. But for some, the idea of taking the time to create and maintain a full-blown budget can be intimidating.”    Anna Prior, Wall Street Journal                   

    The key to financial success is adopting a cash flow plan that will guide your financial decisions on a day-to-day basis. In addition, understanding and controlling how money flows in and out of your life will free you from financial stress and empower you to achieve your most important life goals. Nonetheless, traditional budgeting methods often lead to a sense of frustration and overwhelm.

The reasons why are many:
• Most people lack the skills required to set up a budget and to monitor their progress
• Most people equate budgeting with the need for self-discipline and sacrifice
• Most people get discouraged by the level of detail required and the need to track every expenditure
• Most people are looking for ways to simplify their finances, not make their lives feel more burdensome

    An alternative approach that is getting a lot of media attention these days is “bucket budgeting.” Anna Prior of the Wall Street Journal wrote, “While different names exist for this type of budget and many financial planners have their own take on this style, the bucket image is integral to First Step Cash Management™, a budgeting tool developed by Marty Kurtz, Matt Sivertsen, and Eric Kies at The Planning Center, a financial planning firm in Moline, Illinois.” 

    This user friendly system has proven to be an effective way to manage expenditures, reduce debt, and increase savings (http://www.firststepcashmanagement.com). With the First Step Cash Management system, income flows into three accounts or “buckets.” Each of the three buckets holds a specific type of money and each type of money has a specific use or purpose. While the uses are all different, all three buckets are interrelated.
    The Static Account™ bucket holds money that has been spent, or has been agreed to be spent, at some point in the past. These are our regular monthly expenses such the mortgage, utilities, insurance, home equity loans, student loans, and auto loans. Money is also allocated to this bucket to pay down any remaining credit card balances.
    In contrast, the Control Account™ bucket contains money that will be spent within the next seven days. Control expenditures include things such as groceries, gas, entertainment, and eating out. Lastly, the Dynamic Account™ bucket stores money that will be spent in the future for goals such as retirement and education funding, vacations, gifts, and special purchases like furniture and appliances.
     
Once this cash flow system is set up and tweaked based on individual priorities and circumstances, the system goes into auto pilot and detailed tracking of expenditures is not required. The result is a simple decision framework that brings clarity and purpose to personal finances.

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