Cash-Flow Management 101

If you're struggling to manage your cash-flow, an allocated spending plan can help. In a nutshell, an allocated spending plan is a type of budget based on using percentages of your income.

For example, the Dave Ramsey allocated spending plan gives every dollar a place and purpose. The idea is to cover the necessities first, then fill in the rest of your budget depending on your goals.

How your spending gets allocated depends on your personal situation. Keep in mind, what is essential or necessary will change as your life progresses.

What's unique about the Ramsey Allocated Spending Plan is that it allocates expenses by pay period. For irregular income or cycles, Ramsey suggests basing your income on your lowest paid month from the previous year or cycle.

As mentioned, you're not budgeting on a monthly basis, but instead, you're using pay periods. For many of us, pay periods are not always consistent. For instance, self-employed professionals may get paid every week, once a month or even multiple times per week.

The advantage of this approach is that you get far greater insight into your budget and it works for almost any income cycle. Where Ramsey's allocations are useful is finding out when and where you're overspending.

The goal is to have spent less than you allocated. At the end of the pay period or month, after allocating every dollar you've earned, hopefully you have something left over to save or invest.

Similar to the Ramsey Allocated Spending Plan is the FFC cash-flow accounting and budgeting method, which is a percentage based formula and can be easily broken down into a 20/60/20 spending method.

The method recommends using 20 percent of the money you bring in toward giving and receiving (saving). Essentially you’re choosing to pay yourself first so that you can fund the most important goals you have in your life

After that, you have 60 percent to put towards fixed costs, such as housing and transportation. Lastly, 20 percent, or anything that's left over after your financial goals and fixed costs, can be spent however you want. We call this your flexible spending.

We've put together a step-by-step process for taking control and managing your cash-flow. Simply opt-in on www.ffcadvisors.com to gain immediate access to our eBook: How to Create Margin in Your Cash-Flow.