There are many paths to financial abundance: inheritance, marriage, lottery, business success, just to name a few. For most of us, however, the path to financial abundance will be paved with savings. It is a method based more so on self-discipline than luck. In that regard, it can be gratifying. The essence of saving is to spend less than what is earned. Yet this simple concept is easily lost in the complex world of digital money. Quite simply, it is very easy to over-spend.
To manage this potential problem effectively, it helps to look back to simpler times, remind ourselves what worked then, and adapt those strategies to today’s realities. As a young adult in the 1980s, I lived for years in a cash-only manner. I would cash my paycheck on Friday afternoons. The cash was then allocated to a series of paper envelopes labeled rent, truck payment, utilities, food and extra. Each of the first four would receive 25% of the required monthly obligation. Any cash left over went into the extra envelope. At month’s end my bills were covered, provided I remained faithful to the system week after week. Then my bills would be paid either in cash or by money order. I had no checking account, only a savings account.
Limiting Discretionary Spending
Any discretionary spending had to be paid from the extra envelope. This placed limits on my spending, a form of self-discipline. On those occasions when an unexpected necessity exceeded the contents of the extra envelope, I would “borrow” from one of the other envelopes knowing it had to be repaid from the next paycheck. With no credit cards on which to accumulate debt, my net worth grew over time. (For related reading from this author, see: 10 Ways to Jump Start Your Savings Plan.)
With the benefit of hindsight, what made the envelope system work so well is that I always had a clear awareness of my cash flow. With that awareness, I had the information needed to make sound spending decisions throughout the month. My bills were covered and I knew how much extra was available at all times.
Tracking Personal Cash Flow
To bring that clear awareness and real-time management into today’s environment of credit cards, checks, automatic debits, etc., a different tactic is needed. There are some digital tools available, but I am a pencil-and-paper kind of guy. So, that was my challenge. My solution was to divide my monthly spending into two categories: normal and discretionary. Normal encompasses the recurring monthly bills which once upon a time had their own envelope such as mortgage, truck payment and utilities. This is the relatively fixed or inelastic portion of my household budget. I have those items listed on a monthly spending sheet along with the total amount required each month.
With this number in mind, I decided on an all-in spending number (normal plus discretionary) that was below the household income. This ensures a positive cash flow situation, the essence of successful savings. From the all-in spending number, I subtract the normal value leaving what represents the amount that would be in the extra envelope. The last bit of math is to divide that number by 30 so that I have a daily spending target. This discretionary spending of extra money gets tracked on a notepad every day. A running tally of the over/under is also tracked daily. It may sound overly-simplistic but I have been using this method for years. It really works! (For related reading from this author, see: What Are the True Costs of Your Household Expenses.)
Financial abundance is within reach for all of us. To achieve it, one must get and stay cash-flow positive on a consistent basis. With a clear awareness of income versus spending coupled with diligent tracking and management, everyone can succeed in this important quality of life issue. For more details and insights into this and other important financial topics, please see my book, “The Game Changer’s Guide to a Better Financial Life,” available through Amazon.
(For more from this author, see: How to Solve the Retirement Equation.)