We have all heard of the term, but it appears to be one of those financial terms that has a different meaning to everyone. To some people cash flow banking is just another word for budgeting. However, this article will explore the idea by looking at what cash flow banking is on paper, how it works in theory and finally giving our opinion on it.
What Is Cash Flow Banking?
Cash flow banking is a method of working out projections and then assessing if you can afford something or not. You start by setting up a cash flow bank and getting into the practice of regularly adding to it, for example monthly. Over time your account will fill with money and you use this to ‘play’ with, within the bounds of your projections. This is the theory at least. Cash flow banking does not have a great name in mainstream finance as it can be used by people who use credit cards irresponsibly and then act surprised when they cannot afford repayments.
How Cash Flow Banking Works?
You start by setting up a new account, perhaps you use online banking to do this. If you are unlucky, your bank will make it difficult for you to open many accounts at once by not allowing transfers from some accounts unless they have been open for three months etc.
If you are unlucky, your bank will make it difficult for you to open many accounts at once by not allowing transfers from some accounts unless they have been open for three months etc.
Having set up your account you then need to add new money into it regularly, perhaps monthly. If you are really organised you will already be doing this with a standing order.
If you are really organised you will already be doing this with a standing order.
Now comes the fun part! You get to play with your money and imagine that it is real . Pretend you have just received a bonus or that it’s your birthday, add the amount of money to your cash flow account and start spending. If there is not enough money in there, try again next month. This forces you to imagine your life with the money and not go overboard.
Pretend you have just received a bonus or that it’s your birthday, add the amount of money to your cash flow account and start spending. If there is not enough money in there, try again next month. This forces you to imagine your life with the money and not go overboard.
Now look at the projections you have made, are they realistic? If there is money left in your account after all of this, great! If it has gone down to zero, cuts need to be made. This step is where cash flow banking gets difficult as it requires discipline to curb spending. It also requires honesty with yourself, don’t try to deny it is gone.
If there is money left in your account after all of this, great! If it has gone down to zero, cuts need to be made. This step is where cash flow banking gets difficult as it requires discipline to curb spending. It also requires honesty with yourself, don’t try to deny it is gone.
Once you have cut out all fat and there is no money left, you need to start looking for ways to generate more income. This could be a second job, selling stuff or even asking for a pay rise. You may not like what you see as options, but this step forces you to think about the future and not spend frivolously.
Once you have cut out all fat and there is no money left, you need to start looking for ways to generate more income. This could be a second job, selling stuff or even asking for a pay rise. You may not like what you see as options, but this step forces you to think about the future and not spend frivolously.
If your income does increase, add this to your projection and see if the available money in your cash flow account has increased. If it hasn’t you need to look at cutting further or increasing your income. This step forces you to be honest with yourself about what you need to save for over a certain time frame. It also tells you much more about what your cash flow is likely to be like in the future.
If your income does increase, add this to your projection and see if the available money in your cash flow account has increased. If it hasn’t you need to look at cutting further or increasing your income. This step forces you to be honest with yourself about what you need to save for over a certain time frame. It also tells you much more about what your cash flow is likely to be like in the future.
When you get comfortable you can expand this system to include savings accounts, investment accounts and credit lines. Once it becomes second nature you will start seeing opportunities everywhere.
So, for a simple money management system, this works well and has been very effective for me. I have tried to do it on spreadsheets but just found the process too slow and cumbersome. The other problem with spreadsheet systems is that because they are so easy to update you soon find yourself overspending just to see your figures go up.
