How to Win the Spending Game by Managing Cash Flow

Everyone has bills to pay, be it student loans, a credit card, or a mortgage. But if your savings account isn’t consistently growing, then you’re spending all your money.

There are only four things you can do with your money: spend it, save it, pay down debt, or pay taxes. Taxes are usually set aside from your paycheck, or you set them aside yourself if you own a business or do contract work. The best way to determine if you’re winning the spending game is to take a good look at your savings.

If you are saving consistently each month, then the question becomes: Are you outpacing your peers? And the only way to answer that is to take a good look at your cash flow.

When analyzing cash flow, it’s best to use a spreadsheet.

Begin with your gross income at the top and create four categories of disbursements: expenses, taxes, insurance, and savings. There is a reason to begin with gross income and then subtract the taxes reported on your pay stub. While taxes are mandatory, you can choose the amount of exemptions you claim in order to have more or less withheld, so it could look very different from person to person.

The insurance category should include all types of insurance. The different types commonly reflected are: health, group life, group long-term and short-term disability, auto, umbrella, personal property (jewelry or artwork), individual life, and individual long-term disability or short-term disability coverage. The cost for many of these can probably be found on your pay stub. Households that are adequately insured typically spend between 6 and 9 percent of their gross income on insurance.

Your savings reflects the amount of money actively being set aside each month. And this doesn’t mean saving up for things like vacation. That would actually be classified under the expenses category because although it is money that you are technically saving, it will be spent on something other than an emergency or retirement, and that’s the only money that qualifies here.

Included in your savings category are emergency fund contributions and retirement contributions like your 401(k), Roth 401(k), IRA, Roth IRA, Non-Qualified Deferred Compensation, or money that you are investing monthly in a brokerage account. If you’re able to save 25 percent of your gross income, then you’re in excellent shape. Most people first aim to get to the point where they can save 10 percent of their gross income, and then will gradually increase that amount until they can save 15 percent, 20 percent, and then 25 percent.

Expenses includes everything else: housing costs, bills, groceries, eating out, clothing, spending, credit card and student loan payments, travel savings, etc. And the best way to determine if you’re winning the spending game is if your total expenses (not insurance, taxes, or monthly savings) adds up to 55 percent or less of your gross income.

Most people are actually spending between 59 and 70 percent of their gross income. If that’s where you’re at, try to shave 5 percent off your expenses, if possible, to begin with and slowly decrease them over time until you can get to that 55 percent threshold.

If you find you are spending 70 percent, it’s important not to immediately drop to 55 percent because you will feel “broke” and have a higher likelihood of rebounding and spending more. When you cheat on a diet, is it just for a snack? Or one meal? No, you usually binge and end up gaining more weight back than you lost. Money is the same way. If you restrict yourself too much, a reduced spending level will be harder to maintain. And rebounding from a financial diet doesn’t just result in too many helpings of mac and cheese. It usually comes in the form of credit card debt, anxiety, or depleting savings that were meant for something else.

When people can keep their housing costs (rent, mortgage plus escrow plus HOA dues) under 22 percent of their gross income, it gives them the best chance of winning the spending game. And 18 percent is ideal. Any higher than 22 percent may be possible, but it will be much harder to keep other expenses in line. Utilities (phone, water, power, natural gas, Internet, cable, streaming subscriptions, etc.) should be kept at or under 6 to 7 percent of your gross income.

Creating your own cash flow document is a good way to determine where you stand financially and how you can improve your monetary situation. In order to win the spending game, you have to first make your way to the starting line.

Katie Waters is a member of the DailyWorth Connect program. Read more about the program here.

Advisory services offered through Investment Advisors, a division of ProEquities Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is independent of ProEquities, Inc.