Manage Your Cash Flow Like a Business

Break your budget into manageable pieces. Here are basics of cash flow allocation.

Generally, companies will have a cash-on-hand account to cover immediate cash needs, a working capital account to cover ongoing operating expenses, and a long-term account to save for future capital investments. What if you structured your personal budget around three different accounts much like a business? It’s really not complicated.

The goal is to simplify, and the best way to do that is by breaking your budget down into smaller, more manageable pieces. And, if you think about these pieces as "compartments" or "buckets," it becomes easier to manage them according to their objective or purpose. Your spending objectives will be more clearly defined, and, by having separate guidelines for each account, your financial decisions are practically made for you.

Here’s how you can manage your cash flow like a business:

Daily Spending Account (Cash-on-Hand Account)

Your daily spending account is a checking account used to pay your budgeted expenses. You deposit the amount you need each month to cover your daily expenses, bills, and other lifestyle needs. If spent wisely, any excess cash can be transferred to your Savings or Emergency accounts.

Emergency Fund (Working Capital Account)

Before starting a long-term savings or investment plan, it’s vitally important to establish a fully liquid, completely safe emergency fund. As part of your initial budgeting, budget for a minimum savings amount that can be deposited in an interest-bearing checking, savings, or money market account at the same time you deposit funds in your daily spending account. Once you achieve your goal of establishing your emergency fund, you can then allocate your monthly savings towards your savings account.

Savings Account (Capital Account)

Your savings account is an interest-bearing checking, savings, or money market account that houses the funds you’ve earmarked for savings or investment towards your financial goals. The amount that goes into this account is established as a monthly savings goal, separate from your automatic contributions to your qualified retirement plan, which should be deposited at the same time you make a deposit into your daily spending account.

You Need to Fund an Exit Plan Account

Finally, you need an Exit Plan account. Just like business owners, you need an exit strategy on your terms with the best possible outcome for you and your family. Because things don’t always go as well as planned or hoped for, you need to fund a retirement plan. Business owners who wait too long to begin funding their retirement plan are often forced to change their exit plans, which might involve working in their business much longer than they intended.

Working with a local bank like American Bank can provide you with an experienced advisor and resource who can help you develop and structure your financial plan. It’s never too early or late to start planning for your financial future.