Turn your checking account into a cash management system

As a former financial planner I implement and use a tool called the Cash Management System. This idea is more of a cash flow diagram that utilizes your primary checking account as the main source of your income and expenses. It incorporates your budget and gives you the "big picture" of your monthly cash flow.

The purpose of the Cash Management system is to have a plan for your income and a guide you can refer back to and adjust as needed. The basic formula for the system looks like this:

Income = Monthly Expenses + Savings Transfers + Debt Payments (if any)

It also assumes that by month end the account balance will be $0. This means that every dollar that comes in will have some purpose. It guides you so that if you have lower expenses one month you can transfer it to savings such as an emergency fund, retirement, vacation savings, and so on. By keeping your "extra" money out of your checking account you won't be able to spend it as easily.

This system only works if you carefully track and budget your money. You have to look at your income versus expenses each month and make transfers accordingly. You should also set up automatic transfers to savings each month so you are sure to save something. At the very least you need a percentage budget (such as 50% needs, 30% wants, 20% savings) so you can calculate the amounts and set up transfers.

Secondly you have to maintain some sort of self control. If you get a windfall, gift, bonus, etc. you need to be able to not spend it or immediately move it out of the cash management account. Personally I take extra income and immediately add it to my savings account(s). In December I examine my tax situation and transfer money to retirement accounts that give me the best overall tax advantage (Usually a Roth in my case). The point is to get it out of your spending account ASAP.

Once you get the hang of things the cash management system is a simple, helpful tool that keeps you on track and also keeps you aware of how you spend or save every dollar. It takes some getting used too but the time investment is worth the return of peace of mind and not worrying about paying rent or buying gas next month. Invest in your future!