If you’re like most people then you know that your spending habits ultimately determine your ability to generate wealth. If you spend more than you make then you will go into debt which is not a sustainable. If you’re able to spend less than you make then you can set money aside for savings and investment. Do this long enough and you’re almost certainly going to become wealthy. This concept is widely understood yet very few people track their spending. In my opinion it is one of the most important yet overwhelming processes in the financial planning field.
One of my long-term professional goals is to come up with a process for helping households evaluate their cash-flow and provide clarification on the age-old question: Where does my money go each month?
In doing some preliminary reading I came across THIS ARTICLE from the December 2008 “Journal of Financial Planning“. In it the author takes a unique perspective in measuring cash-flow. Most models I see use a fairly simple approach where a person categorizes their spending into different accounts such as “housing”, “groceries”, “entertainment”, etc. With this approach the author views spending in…..
1. The static account is their 30-day
money. This is what it takes to run
their household for a month—the
mortgage, utilities, car payments,
2. The control account is their seven-day
money. These are the funds that they
will spend today or within the next
week. These are lifestyle types of
expenses—dining, recreation, hobbies,
groceries, and gas for the car.
3. The dynamic account funds all future
expenses, from trips and gifts, to cars,
education, and retirement.
This perspective is fairly simple and allows the household to see what areas they have control over. I look forward to giving this approach a whirl soon.