I took Dave Ramsey’s Financial Peace University (FPU) course last fall and learned quite a bit. I entered the class not expecting to learn too much but came out surprised with the many fresh ideas Dave gave me.
One of my favorite lessons focused on cash flow planning. Cash flow planning allows you to plan where your income (in flow) is spent (out flow). Rather than following a “spend as you go” strategy, cash flow planning provides you a plan for the month ahead so you can consciously decide where your money will be spent. This plan gives you visibility into what you truly *need*, what you *want*, and where you are wasting money.
Creating and Following a Cash Flow Plan
To create a cash flow plan, you can use plain old pen and paper or, what I choose to do, use a spreadsheet. A spreadsheet lets me make easy comparisons month to month, use formulas to avoid math errors, and is just plain convenient. Start by listing your take home income at the top of the spreadsheet. Then list categories (like Saving and Philanthropy) and, within these categories, more specific entries (like House Fund, Roth IRA, Catholic Charities, Church):
Allocate every penny of your income to a category. This will result in the total spent amount equaling your take home pay. After following the plan for a month or two, you’ll see where you should plan to spend more or spend less. Initially, I found following the plan very challenging but have grown to like the plan, especially since my most recent vacation was fully funded :) Here is a link to my Cash Flow Plan in Excel 2010 format.
Pay Yourself More and the Credit Card Companies Less
The most significant benefit cash flow planning has brought to my financial situation is that of facilitating paying myself first. Paying yourself first is the practice of taking money out of your paycheck as soon as you receive it and placing the money in savings and/or investing the money. Ideally, you should set up an automated transfer where a given amount is transferred to your savings or brokerage accounts at the beginning of each month. Having set up an automated transfer, I fill out my savings column without fail and avoid the “I forgot to make the transfer at the start of the month and now I don’t have any money left” excuse. Paying yourself first takes money from a location where it’s easily spendable and puts it in a savings or brokerage account where impulse spending cannot easily reach. Also, once you determine a suitable amount to put away, you’ll find that you won’t miss the money.
Another benefit of cash flow planning I’ve experienced is that of saving up for big ticket items (think vacations, car insurance payments due twice a year, etc.) in advance rather than putting them on a credit card and paying off the balance later. Prior to attending FPU, I was in a cycle of putting large expenses on my credit card, paying the balance off over the course of a few months, then finding myself at square one when another large expense came up. Cash flow planning allows you to save small amounts each month for upcoming expenses so you’re not put in the position of having to draw from savings or rely on credit cards when large expenses arise. By eliminating credit card payments, you can then flow this cash into more worthwhile pursuits (saving, investing, vacation fund, etc.).
Dave Ramsey’s web site has a great monthly cash flow plan and even includes Dave’s recommendations regarding how much of your pay check you should allocate to various categories: http://www.daveramsey.com/media/pdf/fpu_monthly_cash_flow_plan_forms.pdf. If you don’t already follow a monthly cash flow plan, I highly recommend creating one and being disciplined about following it. You’ll minimize unplanned spending and put your money to better use.