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Designing Your Ideal Cash Flow System

An imperative step in financial planning is knowing where your money is going and why. We call this cash flow planning. Designing a cash flow plan is the heart of your financial plan. It provides life and direction for your finances. It is also one of the most neglected areas in financial planning. 

There are dozens of ways to create a system. Some involve using apps, spreadsheets, linking accounts, and tracking. We have found that the most effective and successful process is to keep it as simple as possible with minimal monitoring. For many of our clients, we generally suggest having two core bank accounts and using a goal-driven system. Here’s our proven process:

The first account is your “cash flow bucket”. This is usually a joint primary checking account. This account will receive your paychecks and is intended to pay your monthly credit cards, rent, or mortgage. From here, you can link to other accounts to fund other goals like retirement planning, education, travel, and more. For example, many of our clients contribute monthly or quarterly to a family investment account to supplement retirement and a 529 Education Plan for college tuition. 

The second account is your “cash reserve bucket”. Ideally, this is an FDIC-Insured Bank with a competitive yield. This account should contain your emergency fund plus any short-term goals or other cash needs within five years, e.g., family vacation, home down payment, sabbatical, etc. This cash reserve bucket is occasionally replenished from the cash flow bucket. However, this account is not intended to pay bills. It is for emergencies and other large cash withdrawals related to your plan. 

This system truly only works after you’ve set a few tangible goals. For the cash flow bucket to function correctly, you need to decide how much you’d like to contribute to retirement and other goals. The beauty of this system is that once you’ve set a few goals, the budgeting should take care of itself. What we have left after funding the various goals is your free-spending capacity. We prefer this system over other methods because it teaches you to think strategically, plan your ideal life, and encourages meaningful action. Budgeting just to budget is like counting calories without a goal

To better illustrate this concept, here’s an example:

  • A family with a young child wants to retire by age 60 and fund their child's in-state undergraduate tuition. Their monthly after-tax income is $10,000/mo. 

  • The entire $10,000/mo income flows directly into their one cash flow bucket. The family currently maintains a 6-month emergency fund. 

  • To help them reach their goals, they hire a Certified Financial Planner™. With the guidance of their CFP® professional, they agree to save $2,000/mo into a family investment account and $500/mo into their child’s 529 account based on their situation. They also dream of taking a 2-week vacation in 6 months with an estimated cost of $6,000. 

  • From their cash flow bucket, here is their savings plan:

    • $2,000 to the family investment account for retirement planning

    • $500 to their child’s 529 account for education planning

    • $1,000/mo for 6 months into their cash reserve bucket 

    • This leaves the family $6,500 to pay their remaining living expenses e.g. mortgage/rent, groceries, credit card bills, dining out, child care, etc. This $6,500 is also a reasonable estimate for a $40,000 emergency fund (6 -months of essential living expenses).

Now, if this family constantly needs to reach into their cash reserve bucket for regular living expenses, it means a few adjustments are required. These could include having too many checking accounts (remember, keep it simple, at most 1-2 checking accounts per family), overspending, or saving too much for retirement and other goals. 

What also helps this system work well is reviewing periodically throughout the year to ensure it aligns with your ideal life. We work with our clients on adjusting at least twice per year. Items that may change your cash flow include new goals, career & income changes, family situation, inheritance, health, tax code changes, etc. Nothing in financial planning is set-it-and-forget-it. Every strategy, plan, and account requires periodic monitoring and updating. 

If you’d like to learn more and discuss your financial plan and cash flow, feel free to schedule an initial consultation. 

*All written content on this site is for information purposes only. Opinions expressed herein are solely those of Ignite Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. This website may provide links to others for the convenience of our users.  Our firm has no control over the accuracy or content of these other websites.


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