Nationally, only 28% of adults have what’s considered healthy finances. That means regular income, good saving habits, and a manageable amount of debt.
That said, many people spend more than they make and have little to no retirement savings. If you're struggling financially, it feels impossible to catch up when you’re already behind.
The good news is creating a financial management plan that's built around cashflow management can help you get back on track. Read on to learn the differences between budgeting and cashflow and how to create a plan that looks toward the future.
Budgeting Vs Cashflow: What's the Difference?
Budgeting and cashflow management are both methods of managing personal finances. Budgeting is a simple view of total monthly income vs total monthly expenses to see if you are spending more than you make for the month. Cashflow management considers the actual timing of each income and expense item to show what your cash balance might be at any time. This is the key difference.
Traditional budgeting apps tend to focus on what you've already spent. They'll look for past trends in your spending habits and expenses to come up with a better way to manage your money.
Cashflow management is about making a plan for the future so you can control the amount of cash you have on a daily basis while also using a budget.
The Limitations of Traditional Budgeting
In traditional budgeting, you often need to make mistakes before you can learn from them. These financial mistakes can lead to debt and bad habits like overspending. Traditional budgeting means you have to learn the hard way.
Plus, most personal budgeting apps look backward, while life happens forward. For example, say you spent so much on takeout last month that you barely had enough to cover your license plate renewal fee. Creating next month's budget with the goal of limiting your takeout spending isn't going to fix last month's problem.
Traditional budgeting often doesn't account for planned, but infrequent expenses like taxes, renewals, and car insurance premiums. These are all important expenses, but because they don't happen every month you might not be prepared for them when they pop up.
Traditional budgeting focuses on one month at a time, but it can be a yearlong budget. You'll look at your previous spending habits and your current income to make a plan.
But what if you've got new expenses to worry about? Say you've started a family, and now you have to cover childcare, supplies, doctor's appointments, and more. Looking at last year's budget won’t be very helpful since you've never had these expenses before.
Benefits of Cashflow Management
Unlike traditional budgeting, cashflow management focuses on the future. While you can't predict everything you'll have to pay for in the next few months, you can plan for most expenses.
If you're planning to take a vacation in 6 months, can you afford it now? If you don't have the money yet, you can make a plan that will help you hit that goal.
For example, you could cancel your streaming accounts and skip takeout for a few months to put that money towards your vacation. You could also get a side gig to earn extra money.
The same goes for routine car maintenance, medical bills, tax bills, and parking permits. When you know what additional expenses are coming up, you'll see what you can realistically afford.
How to Create a Cashflow Management Plan
Cashflow management is more than just earning income and paying your bills. It's an active process that gives you control over your finances. Plus, because this strategy relies on the timing of your expenses, it's important to have a plan.
Step 1: Look at Your Planned Expenses
Consider everything you'll have to pay for in the next month, six months, or a year.
First, make a list of your monthly expenses like rent, utilities, car payments, and health insurance. Then, think about your infrequent expenses like license plate renewals, property taxes, and car insurance (if you pay quarterly or twice a year).
Aside from those necessities, also look at any vacations or repairs you're planning, for example. How much will your flight, hotel stays, and transportation cost? If you need a new roof, how much will that cost?
Step 2: Add Up Your Expected Income
Next, look at all the income you expect to earn. This includes money from your job, your income tax refund, and any other payments you're expecting. Don't forget to include money from side hustles too.
Include the day or month when these payments will happen. Timing is the most important part of managing cashflow.
Step 3: Make Your Plan
First, look at your Net cashflow, which is the difference between your income and your expenses for the month. If you are spending more than you make, you’ll need to make changes. If you are making more than you spend, you’ll need to plan for what to do with what’s left over.
Next, plot all of your income and expenses on a calendar and calculate your balance on each day going into the future, for at least the next 30 days. The point of this exercise is to see if your balance stays positive every day, or if you’ll run into trouble.
Step 4: Action Items
Once you know your net cashflow and have plotted your income and expenses on a calendar, you can see a picture of your financial situation. Are you in good shape or do you need to make some changes?
If you're spending more than you make, see if you can cut some expenses. If rent is too expensive, you could get a roommate or downsize your house. If you won't be able to afford your car insurance premium in a few months, see if you can switch to a more affordable insurance company.
If it's just an issue of timing, see if you can change the due date on your bills. If you're looking for a way to add income, consider asking for a promotion at work. You could also start a side hustle while you look for a higher-paying job.
If your calculations predict you'll have money left over, make a plan to save or invest it. Consider building an emergency fund in case you have an unexpected bill or for months where you might run short. You can also think about saving for retirement.
Because cashflow management looks toward the future, none of this has happened yet. You can make changes to your financial plan before it becomes a reality.
Improve Your Financial Health Today
Once you know how budgeting and cashflow work together, you can make a plan for your finances. Planning ahead will help you avoid expensive mistakes like an overdrawn account or a missed bill payment. It will also show you opportunities where you can save or invest for your future.
At Thinkflow, we offer tools that help you forecast your cashflow and add income when you need it. Sign up today and take control of your finances.