Low-Tech Cash Flow

Today I want to share three low-tech approaches to cash flow management that don’t require any apps or tools or creating a super-detailed budget. Before that, though, let’s start out with what cash flow means and why it’s important.

Cash flow, in a nutshell, is all the money coming in and all the money going out. To simplify it, I’m going to define that as income, spending, and saving.

Your income is all the money coming in. For most of us, the great majority of that is going to be the money you earn through work. Your income has to go somewhere – it comes in, you gotta do something with it – and it can either be spent or it can be saved. That’s it. Your income either leaves you forever, which is spending, or you keep it in the form of saving and/or investing, which I’m going to treat as the same thing for our purposes today.

Now, the reason it’s important to manage cash flow is that it’s fundamental to literally every other financial decision you will make. Like, you can’t have a conversation about taxes without knowing your income. You can’t talk about debt or loans without understanding both income and spending. And you can’t talk about investing until you’ve saved enough money in cash to manage your short-term needs over the next 3 or 6 or 12 months. So you have to get cash flow right before you can start to get ahead in the rest of your financial life.

We can make a really basic equation that represents cash flow, which is income = spending + saving. That makes sense, right? You have all the money you earn and it either gets spent or it gets saved. And the math of that equation is really simple:

income = spending + saving

It’s basic arithmetic, which means that we can rearrange the equation using basic arithmetic. So we can also say that

saving = income - spending

or

spending = income - saving

The math works out the same.

For a lot of people, tackling cash flow starts by making a budget. That approach drills down on the spending side of the equation to hopefully spot areas where you’re spending more than you want and finding ways to save. And budgeting works for lots and lots of people. If you’re one of those people, my hat is off to you.

I personally find it extremely useful to understand how much you spend on average each month. And at least once a year I do the kind of detailed breakdown that’s involved in a budget.

But – I’ll be honest – I treat that just as a vibe check and not a tool to manage spending. In fact, I actually kind of hate budgeting in the proscriptive sense of “spend this much on this thing and that much on that thing”. I don’t like the judgey aspect of it and, if I’m being honest, I’ve not found it to be a big motivator in how I actually spend. Like, if my gas tank is empty, I’m going to fill it even if I’ve met my budget limit for that category that month. And I don’t want to feel bad about that, right? If your plan starts to make you feel bad, you’re more likely to give up.

For me, budgeting feels like a lot of work that ultimately isn’t where I want to put my energy. So let’s look at some other easy approaches that don’t require such a heavy lift, don’t have a “right or wrong” component to them, and are much simpler to manage.

This is a good point to introduce the Pareto Principle, also called the 80/20 rule. It’s named after Italian economist Vilfredo Pareto who allegedly noticed that a smallish number of pea plants in his garden produced most of the harvest. The 80/20 rule proposes that around 20% of the inputs account for 80% of the outputs. So in Pareto’s case, about 20% of the pea plants produce 80% of the peas. But it could also mean that 20% of your customers or clients or gigs account for 80% of your revenue, which is super common. Or even 20% of the players on a basketball team account for 80% of the points. You get the idea.

Now, the 80/20 rule is purely anecdotal and absolutely not scientific. But the reason I want to mention it here is that budgeting seems to me to be the opposite: it’s a lot of work to get started, requires lots of ongoing attention, and in the end maybe you spend 5 or 10% or 15% less each year. And that’s not nothing, but it sure is a long way from getting 80% results with 20% effort.

So, again, if you like budgeting and it works you, I salute you. You’re a hero. But for everyone else, I think there are lots of ways to get more bang for your buck when it comes to cash flow management. Today I want to share three simple, low-tech ways to manage cash flow that I’ve used to great success with actual financial planning clients and in my own life.

The first way is by far the simplest: you can effectively manage your cash flow just by making sure you save a lot. That’s it. If you’re saving enough, you don’t really need to worry too much about spending.

Remember that we can rearrange that cash flow equation to spending = income - saving. If you’ve already hit your savings target for the month, like by automating transfers or putting a bit into savings each time you get paid – then everything else is yours to spend in any way you see fit. If I start working with a client and I see that they’re already saving 20 or 25% of their income, I’m not all that concerned about their spending.

Now, obviously I want you to make sure the essential expenses like housing, utilities, insurance premiums, taxes, etc., etc., get covered. Right? I’m not saying spend your grocery money on candy just because you’re good at saving. But if you can save a significant portion of your income, then you are also effectively managing your spending because you just have less money left over to spend.

The two best ways to do this, as I mentioned, are to automate regular transfers from your checking account to savings or investing accounts or skim off a portion of every paycheck for savings. And, of course, gold star for you if do both.

This is by far the easiest, simplest way to manage cash flow. The only caveat is that you do have to save quite a bit of your income for it to be your only cash flow tool. If you’re only saving 1% of each paycheck, it’s going to be really hard to get ahead. If you want to give this approach a spin, I recommend aiming for saving 20% or more of all income. That’s the gold standard, and if you can do better than 20%, you’re definitely on track to build a ton of financial stability.

Ok, the second low-tech cash flow technique I want to share today is to set a target checking account balance, then every time your account has more than that you move it into savings. Here’s how it works: you pick some amount of money that you know will cover your basic expenses for the next two months. That number is now your one-stop shop for understanding when you have extra money and can save (i.e., when your checking balance is above that number) or when you need to pump the brakes on spending, like if your balance is only half of your target.

The best way to do this is to get an average of what you spend each month. This can be as simple as pulling your bank statements for the last three months, adding up all the money that leaves your accounts, then dividing by three.

If that feels like too much work, then you can also do it by gut check. If $10,000 in your checking account feels like the right amount for you, go for it. But still use those same rules: if your balance goes above that, move the extra money to savings; if it goes below ½ your target, you need to clamp down on your spending.

Here’s an example. So like the situation I just mentioned, let’s say that your target checking account balance is $10,000. When you have more than $10,000 in there – like right after a paycheck or finishing up a big gig – you just move the rest to a savings account. Out of sight, out of mind is actually a super useful trick for managing your money.

On the other hand, if your checking balance gets down around $5,000 in this example, you know that you’re at risk of running out of money next month and it’s time to cut back on spending. Maybe you skip eating at restaurants until your next paycheck or whatever.

Here are the reasons I love this technique:

1. You only have one thing to pay attention to – your checking account balance – and you have an immediate understanding of whether you have extra money you can save or whether you’ve been spending too much.

2. Again, out of sight, out of mind really works. It’s much easier to save money when it’s not in your checking account, even if it’s in a savings account at the same bank. If you want to supercharge this technique, keep your savings at another bank (and especially if that other bank offers better interest rates). That extra friction of not being able to instantly move money from one account to the other makes a difference.

Ok, now it’s time for my third low-tech cash flow idea: take a spending fast. Again, this is super simple, requires no technology, and doesn’t require a budget.

Here’s the idea: I’ve mentioned this a few times, but your expenses can be broken into essential and discretionary. Essentials are the things that you must do, like housing, bills, taxes, etc., and discretionary are the things that are nice to do or fun to do like going out to restaurants, shopping, or taking a vacation.

So a spending fast is a commitment to make no discretionary purchases for one month. I like choosing February since it’s right after the holidays when you a) have just spent a bunch of money, so it kind feels like the right time, and b) if you received any gifts, you probably don’t need to buy yourself anything that early in the year.

Here’s one concession that I make every time I do a spending fast: things like music & video streaming platforms are totally, 100% discretionary spending. Your HBO or Netflix or Disney+, they’re just not essential expenses. Right?

But, since you’re presumably going to be spending a lot of time at home during your spending fast month, because you’re not going out to restaurants or bars or concerts or museums, I think having those streaming options available at home is fine.

Now I’m going to do some real back of the napkin math here. There’s a basic budgeting technique that I like called the 50/30/20 budget, and what it proposes is that you spend 50% of your income on essentials, 30% on discretionary purchases, and save 20%. I like this approach and I’ll include a link to a post I wrote about it in the show notes, but for now we’re just going to use that 50/30/20 as a frame of reference.

So let’s say that you do, in fact, spend 30% of your income on discretionary purchases, and that for one month you pause that spending. That means you’ve saved the equivalent of 1/12th of your total year discretionary spending every time you do a one month spending fast. So if you do it once a year, that works out to 2.5% of your total income not spent. And, if we remember that super simple cash flow equation, when income isn’t spent, that means it’s saved. If you do it twice a year, that’s 5% of your income saved.

And again, that’s assuming that you only spend 30% of your income on discretionary stuff. Which, if we’re being honest, lots of people spend way more than 30% on discretionary. So that 2.5% savings estimate each time you do a spending fast is probably on the LOW side for many people.

Is it more fun NOT to do a spending fast? Of course! I like fancy restaurants and nice cocktails as much as anyone. But taking a break from that kind of spending for one month is honestly not a huge ask, and it helps give you perspective on your spending habits when you end your fast.

So those are my three suggestions for low-tech cash flow management:

1. Save a lot of your income, ideally 20% or more

2. Choose a maximum balance target for your checking account, and move everything above that into a savings account, and

3. Do a least one spending fast each year

Any of those techniques are going to help you get ahead, and you can combine them to super-charge your cash flow management without ever touching a budget.

I hope that’s helpful! I have used all of these approaches at various times in my life and have suggested them to clients with great success. If you try any of these out, I’d love to hear what works for you. Send me an email to share your story.

Thanks,

Timothy Iseler, CFP®

Founder & Lead Advisor

Iseler Financial, LLC | Durham NC | (919) 666-7604

Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.