Step 4 of the Retirement Planning Process is to set up an effective cash flow management system.
A retirement plan blueprint is built upon a projected amount of investment account withdrawals each year. If retirees withdraw more than the projected amount due to cash flow mismanagement, it puts the longevity of the investment portfolio in jeopardy.
Most planners don’t advise clients on issues related to cash flow, but instead choose to only provide advice where there compensated, namely investment management. I think this is a mistake since the detrimental effects on a portfolio of higher than planned distributions are potentially much greater then being “off” on the long-term return.
I recently launched my cash flow management principles in an online course called “Master Your Money”. You can gain free access by visiting:
Outlining all cash flow management principles is beyond the scope of a single article, but let me summarize the key points that must be a part of a system.
Effective cash flow management is built on constructing three walls that separate the different purposes for your money.
The first wall of separation is between money dedicated for this years living expenses and savings. Separate checking accounts are used for each purpose. It is important that all income come into the checking account designed to capture savings and only a systematic monthly distribution gets transferred to the checking account designed for living expenses.
By implementing your cash flow in this way, you will not inadvertently spend money that should be dedicated toward future savings.
The second wall of separation is inside of the purpose of this year’s living expenses. A division is made between high control and low control spending categories. High control spending categories require oversight and diligence to make sure that you maintain spending according to your plan. Low control spending categories do not require oversight.
By maintaining a dedicated checking account each type of spending category (High Control and Low Control Categories), you can isolate the spending categories that need more oversight and consolidate the spending categories that you will never overspend on into a single dedicated account. At the beginning of each month a planned amount is deposited into each checking account (High Control Categories and Low Control Categories)
The final wall of separation occurs inside of the High Control Checking Account.
Each spending decision must be made based upon the available balance of the spending CATEGORY. In other words you need to maintain knowledge of the available balance of each spending category such as eating out, vacation, clothing, car repair, etc.
The “Master Your Money” course details different ways to create current awareness based upon spending category rather than checking account balance. My favorite method is through a smart phone app that separates a checking account into visual envelopes that allow real-time spending to be allocated to the proper virtual envelope. In this way I always know how much is available in a spending category any time I want.
If you have any questions about the implementation of the principles in the “Master Your Money” course, please contact me.