Ahhhh, remember when your parents received a steady salary and paid, like, four bills a month? Times were simple. Times were good.
Your finances—on both the Income side and the Expenses side—are way more complicated. And that, my dear, is why managing your cash flow is so maddeningly difficult to do well.
But there is a way to set up your cash flow so that it’s logical, repeatable, and largely automated.
Why Is It So Hard to Manage Cash Flow?
If you had just a salary, and it came twice a month, and all your bills came once a month, you might not need help managing your cash flow.
But instead of that setup, you have income that comes on several different schedules:
- A salary that comes twice a month
- RSUs that vest monthly or quarterly
- ESPP shares that come every six months
- A bonus that comes annually
On top of that, while you know how big your salary paycheck is going to be (it’s the same every time), all those other sources of income? You don’t know how much money they’ll be until they come. Hard to plan too much around that, eh?
Now let’s look at the expenses side of things.
Some of your expenses are “must haves” (ex., groceries, mortgage). Many more are “nice to haves” (ex., travel, remodel). Some of your expenses come every month, nice and predictable-like (ex., rent, groceries), while others come far less frequently (ex., summer camp for your kids, vacation, a new car).
I, too, find myself in this complex situation. I’m not in tech, but, by running a business, I have multiple sources of income: A salary and quarterly profit distributions. Those quarterly distributions act very much like your RSUs, in that they come infrequently and the dollar amount isn’t entirely predictable.
I have figured out a cash flow system that works well for me, so that’s what I’m going to discuss for the rest of this blog post. I think it can serve as a good framework for you and your cash flow.
Using Different Accounts for Different Kinds of Expenses
I keep my cash in two different places:
- Checking account at my credit union. These are the accounts I live out of, day to day. All of the money for my “regular” expenses goes here. I basically get no interest on the cash, but I get lots of convenience!
- High-yield savings account at Ally. I keep my money for less-frequent expenses here. I like being able to cordon off this money from my day-to-day money. I like getting a higher interest rate. And I like using Ally’s “buckets” to save specifically for each of my many goals over the next couple years (ex. vacations, house projects, gifts). It’s less convenient to access the money than my checking account is, but that’s ok because I access it so infrequently.
Setting Up the Cash Flow for My Salary
Let’s start with my salary, more specifically, the amount of money that I actually receive in my paycheck, which is to say, after taxes and 401(k) contributions are withheld.
This is the same amount of money, each time, so I can automate how much goes where via direct deposit. Most of you probably already do this, too.
Enough of my take-home salary to cover all my ongoing expenses and ongoing savings gets deposited into my checking account.
- I figure out my ongoing expenses by tracking my spending. I use Monarch Money. I encourage you to get a sense of how much you’re spending on “the regular stuff.” Let’s say I spend $7k/mo on ongoing expenses. (And yes, I realize that many of you spend more than that on just your mortgage; it’s an example, people!)
- I also save to various investment accounts from my salary: our HSA, our kids’ 529 accounts, and my husband’s and my joint taxable brokerage account. Now, how much to save to these accounts is a giant question that is what real financial planning can help you determine. For now, let’s say that I determine I need another $3k for this, as a “minimum viable” savings. (More savings to come later.)
- So, I need a total of $10k going into my checking account each month.
And then I set up automatic transfers out of my checking account to my savings accounts, and all my regular bills get paid from my checking account in one way or another.
All of this happens automatically. I don’t have to do anything, month to month, to have my ongoing bills paid and ongoing savings accomplished.
[Now, you might be thinking, “Woman, after I contribute to my 401(k) pre-tax, my 401(k) after-tax, my HSA, and the ESPP, I’m taking home $14 each paycheck! I can’t pay any of my bills with it!” Understood. I have a special blog post just for you, because this is a very common challenge in tech: “Is Your Take-Home Pay Too Tiny to Live On?”]
I do have one more account at my credit union, and that’s a small Emergency Fund. The bulk of my emergency fund is at Ally, but it can take a business day or two to get money from Ally to my checking account, so I like to have a little extra cash lying around that I can access instantly.
My required expenses and minimum viable savings don’t use up my entire salary. So, whatever is left over (which is, again, a dollar amount I can calculate) gets pushed automatically from every paycheck into our Ally account.
I Ally is where I hold my emergency fund and also where I save up for the bigger, less frequent expenses. I have many such expenses!
Some are fun (50th birthday trip to Puerto Vallarta!). Some are just responsibilities (annual insurance premiums). Some of these expenses are predictable in size and timing (like those insurance premiums). Other goals have varying price tags and timelines. One year we want to go to Vancouver Island, which we can drive to. The next year we want to splurge on a long trip to Italy.
How does the money get out of Ally? When one of those goals or expenses I’ve been saving for comes due, I manually move that money from the Ally account (from the relevant bucket) into my checking account. All the actual spending happens from my checking account.
Here’s what the full cash flow looks like from my salary:
Setting Up the Cash Flow for My Quarterly Income
Now let’s look at my quarterly, less-predictable income.
This part I can’t automate, just as you can’t automate movement of your RSU (or ESPP or bonus) money, because we don’t know ahead of time how much money it will be.
When my quarterly income comes in, the first thing I do is set aside enough cash to pay the taxes on it. I do this simply by putting cash into a “tax” account out of which I will pay my estimated taxes later. With your RSUs, hopefully you can accomplish this automatically by electing to have your tax withholding raised to a high enough level (the default withholding on RSUs and bonuses is 22%, which isn’t enough for a lot of people).
With the after-tax money that remains, I manually move it into my Ally buckets until all the buckets are filled.
My quarterly income is really how my “fun” gets paid for. Note that, not at all coincidentally, this is the easiest kind of spending to turn off, if somehow my income dropped a lot (or if your RSU values dropped a lot) and I was unable to fill those fun buckets. Also note here the embedded assumption that you save up for these big expenses before you spend money on them. You don’t put them on your credit card, assuming you can pay them off with future income.
When that is accomplished, I can start pushing this quarterly income into long-term savings (our taxable investment account) and paying down our mortgage more aggressively.
My husband and I fully fund the goals at Ally before saving more to our long-term goals. We can reasonably do this for two reasons: we naturally spend less than we can, and our existing long-term savings is already robust and doesn’t need to grow much. This doesn’t necessarily work for you! You could reasonably set up your cash flow to follow different rules. You could, for example, choose to put 50% of after-tax quarterly income towards goals and put the other 50% into long-term savings.
Here’s our entire cash flow for my quarterly income:
And If I Get a Small-ish Windfall, It Fits Right In!
If I ever get a small-ish windfall (a monetary gift or tax refund, for example), I can slot it right into that “quarterly income” side of the diagram. I can use it to fund big, infrequent expenses or to boost my long-term investments and pay down my mortgage even more.
If you get a significant windfall (like a $3M IPO or inheritance, but really it’s all relative), you probably want to revisit your whole financial plan. Have your goals changed? If they have, then you probably need to redo how money moves through your life.
Finally, here’s what my entire cash flow, for all my income and savings, looks like:
Setting Up Your Own Effective and Easy Cash Flow
You likely shouldn’t use my exact cash flow setup. Your cash flow is different from mine, in quality and quantity.
I don’t get an annual bonus; you might.
You might be in a stage of life where you need to save way more (or less!) than I do.
While I can pay all our ongoing expenses and do our minimum viable savings with my salary take-home, you might not be able to. (That’s very common among my clients, in fact.) You might need to use some of your RSU or other infrequent income to help cover your monthly expenses.
Even though my exact cash flow isn’t the right fit, I do hope that you’ll take away from it some good governing ideas from this discussion:
- It’s essential you get a good-enough grasp on how much you’re already spending and, to the extent possible, how much you want to spend on goals in the future
- Use separate accounts to hold money for different kinds of expenses or goals. I generally like to have “1 goal per account (or bucket)” and to separate monthly ongoing expenses from bigger, less frequent ones. This makes it easier for me to tell if I’m on track to pay for each individual goal.
- Fund as much of your “must-have” spending and saving as possible out of your consistent, predictable income (salary) and reserve your variable income (RSUs, ESPP, bonus) for “nice-to-have” expenses and extra savings. In the event that variable income is lower than expected, you can simply slow roll saving for a nice-to-have expense (as opposed to falling behind in your retirement or college or other essential savings).
- Automate as much as you can. Your variable income will likely just have to remain entirely manual. My advice? Put a recurring entry in your calendar to remind you to sell RSUs and ESPPs and move the cash around. That way, you at least don’t have to remember anything.
- Try to get some higher interest for big, static piles of money, but not at the expense of too much inconvenience.
It is far easier for me to showcase how logical and tidy this arrangement is in the current moment than it was to set it up and tweak it over the course of years. Yes, years. My advice: Set up something that you think works for your income and and expenses, see what part of it breaks or Just Doesn’t Fit Quite Right, and then fix that one part. Rinse and repeat.
Keep in mind: This cash flow setup didn’t just come from nowhere. It flows logically out of my family’s financial plan. It is not the financial plan itself. And your cash flow setup won’t be your financial plan. It will be one way of implementing your financial plan.
You first have to get clear on what you want in your life, both now and later, and how much all of it costs, to some reasonable degree. If you don’t know how much your kid’s college will cost or how much you need to have saved for retirement or how much that trip to Italy will cost in two years, how can you ever set up a system that puts the right amount of money in the right place at the right time? It’d be like answering a math problem when you don’t know what the question is. “I don’t know…2x? Or maybe the square root of 77?”
Do you want your cash flow to just work, no muss no fuss? The right dollars in the right place at the right time?
