Save First Cash Flow Planning

Geoffrey Schaefer, CFP®

Budgeting has a pretty nasty feeling associated with it, and for good reason. Excel spreadsheets, spending trackers, saving all your receipts… all pretty tedious for most people. Cash flow planning is perhaps the most essential and basic part of financial planning, but can you reach a place where budgeting in its traditional context is no longer necessary? Short answer, Yes.

As in all personal finance matters, this is rather subjective, but as a rough guide, if your income doubles your expenses, you may be able to forgo the traditional idea of cash flow tracking. The average American family of four spends well over $100,000 not including taxes, so if your household income is above $300,000 this concept could be for you.

I’m going to generalize here a bit, this person usually owns their own business or is in a career like law, tech, sales, or medicine. Not only do they earn a very competitive salary, but business interests, Restricted Stock Units, stock options, commissions, and deferred compensation plans may exist as well. Compensation has grown over the course of a decade or two and the cost of living and lifestyle has grown, but at a fraction of the rate. If this sounds like you, maybe you can ditch the excel spreadsheet and use a save first cash flow method.

So Save First Cash Flow Planning is right for you. What does this mean?

You’ve worked hard and been fortunate enough to earn a great income. Through that and some discipline, your income far exceeds your cost of living. Now estimates of monthly costs are more acceptable. Impulse purchases can be more acceptable. Yes, you could work to maximize that savings more, but is that worth the tradeoff of lifestyle and experiences today?

How it works:

Much like the name suggests, the first task is to save. In this case, many retirement goals can be well in hand. With this level of cash flow, the amount saved far exceeds retirement account contribution levels and other goals should be considered. Whether they be a vacation property, kid’s college, a work optional lifestyle at age 50, or charitable inclinations, goals outside of retirement are well within reach.

Figure out what you value and prioritize it. Perhaps it is retirement, owning multiple homes, having more time with family, and giving away half of your net worth in retirement. All great goals, so let’s save for them.

Determine how much you need to save. Take all these big goals and break them into small, repeatable, and consistent tasks. Here are a few examples:

  • For Retirement, Max out you and your spouse’s pre-tax 401(k)s, backdoor Roth IRAs, and use the after-tax option in your own 401(k). This easily exceeds $60,000 a year.
  • For your vacation and charitable goals, you determine you need to add, $30,000 of your salary along with your $100,000 of RSU proceeds. A simple joint account may work early on as it is flexible and then perhaps you split it between a trust and a Donor Advised Fund later in life.
  • You are saving $190,000 a year. You have the number that aligns your income and capital with your values- Save first!!!
  • Set up auto contributions where you can. Have your advisor document your RSU schedule and call you every time they vest. Every quarter, move extra cash out of your emergency fund. Make the $190,000 happen no matter what.

So now what? That’s where a save first cash flow plan is so liberating and flexible. Now make sure you can account for your taxes, and then spend what is left.

We would suggest breaking up the spending in two distinct categories and then simply track those.

First: Necessities. Your mortgage(s), your phone, your utilities, your groceries. Know what this looks like every month. If you are implementing this strategy, it is well below your income. Have a bank account or card that all of this is tracked to so you can easily pull up numbers if you feel things starting to shift. You are tracking the big number monthly, not every transaction.

Second: Wants. This is dining out, lifestyle expenses, kid’s activities, travel, a boat if you really like to spend money on things you’ll never use (just kidding… kind of). This is whatever is left over. A save first cash flow plan has given you a green light on this category. Let’s say after you save and pay for necessities, you have an average of $10,000 a month left. If you spend all of it, great! It was yours to spend and your goals are still being met in line with the values you laid out in your plan. If you don’t spend it all, maybe invest more, start a business, give it away, or whatever you can think of. The save first cash flow plan gives a high earner with good spending habits the green light to use the money however they see fit.

Some practical ideas for implementing a save first cash flow plan:

1) Look back at several months of statements and be realistic about your after-tax income and what you spend. A plan based off idealistic numbers will not be effective.

2) Make a system to spend your necessity dollars and wants dollars.

– Common ideas are:

  • Two separate bank accounts- one for needs and one for wants
  • Separate credit cards- same idea as the bank accounts

– Anything that helps you open up to the big picture of your monthly cash flow. I don’t care about the 10 different times you went to brunch. I care that your discretionary wants spending was within reason and in line with what you expect to spend on non-essential things.

3) A similarity between traditional budgeting, save first cash flow planning, and really all financial planning in general is that we need to automate whenever we can.

  • Humans are so good at the status quo. Any level of activity or decision making lessens the likelihood of us following through. To help this, we set up bills on autopay, we auto contribution to investment accounts, we hire professionals to help with taxes, estate plans and financial plans.

4) Revisit every six- twelve months. The whole point of this system is to help you think about your cash flow less. Personal finance is personal and there is subjectivity and nuance in all situations.

If the way your business is set up impedes the process, make some changes and figure out how you can think about your cash flow less. If you know you are saving $10k a month (and are doing that first), spending $10k on needs, and then $5k on wants, you have a separate card or account to roughly track that $10k needs and $5k wants amount. If you see a trend where are slowly spending less or more, readjust.

If this plan is appropriate, what it will do is continue to track your cash flow and allow you to save for your goals while freeing up time and mental energy. No, you don’t need an excel sheet, no you don’t need a tracking app, but yes, you do need direction and purpose for your monthly. Cash flow planning at every level simply aligns your income with your values. That alignment along with a system to implement it will be the start of a wonderful financial plan for you.

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