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Avoiding the “Shell Game” – Budget free cash flow management

I am always looking for new ways to explain financial concepts. Earlier this week, a client used the phrase “avoiding the shell game”.

This analogy is a great description of how most people handle their day-to-day cash flow. They get paid, pay some bills, buy some groceries, and maybe even put some money away for a rainy day. By the end of the pay period, they find themselves pulling money out of savings to make it through. When the car needs a repair or the furnace goes out, the emergency fund is depleted and the credit card balances start increasing.

That is the essence of the shell game - a never-ending cycle that leaves many people feeling powerless when it comes to their personal finances.

Here are some tips you can use to get out of your personal “shell game”:

Pay yourself first and make it automatic

Most people do this backwards. Paychecks come, bills get paid, spending happens, and whatever is left over is saved. The problem is that there is never money left at the end of the day. I propose that you reverse the order. Deposit the paycheck (direct deposit is best), SAVE AUTOMATICALLY FIRST, pay the bills, and then spend.

My wife and I started small, saving $25 per paycheck via an automatic transfer that we set up to happen every payday. Guess what? We didn’t even realize the money was gone, so we doubled the amount. When we still didn’t notice the money was missing, we knew we were onto something. We kept increasing the amount saved per paycheck and when we felt the pinch, we stopped increasing it. The amount we ended up saving per pay period was much higher than we thought it would be, and

the savings account started growing. We had found our natural level of savings, and every time we get a pay increase, we increase our savings appropriately.

Use online bill pay to schedule bill payments to occur on pay day

I am not talking about automatic bill payments where the utility or loan company takes money out of your bank account on their schedule. I am talking about scheduling your bills via online bill pay service (most banks have this available) to come out on the payday. Essentially, this puts you in a position where there is always money available to pay the bills.

Now you can spend guilt-free!

After savings has happened and bills have been paid, you can manage your spending throughout the rest of the pay period without having to rely on strict budgets or other standard techniques that cause more stress than they are worth. Once the groceries and other basic needs are purchased, you can spend without worry as long as you don’t overdraw the account. Want to splurge a little and go out for a nice dinner, go for it! Want to have a night out with your friends, no sweat! Keep it within reason and know that if you get too crazy, you may have to go easy on the Starbucks until the next payday.

Monitor your spending so you can make adjustments

I am not saying you can go out and spend money willy-nilly without thinking about it. You will need to use Quicken or some other method to track your spending. Every so often, my wife and I find that we are running out of spending money a day or two before the next paycheck. That is when we jump onto the system and see where our money went.

Nine times out of ten, we can easily see where our spending is out of whack. Oh, we spent way too much on restaurants this week. Oh, that weekend trip to the outlet mall really hurt us. Then we cut back and adjust for the next time. Now we are managing financial behavior effectively. Within a few months, you really start to get a handle on how much discretionary income you have available and you can start to manage your cash flow dynamically instead of relying on a static budget.

Making this small change can have an astounding effect on your ability to manage your cash flow. I realize that a financial planner talking about avoiding a budget may be a little counter-intuitive, but my experience is that budgets are a major source of stress and guilt for most people. By paying yourself first and automating the process as much as possible, you can find freedom from the shell game and take control of your cash flow situation.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

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