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Simply put, your cash flow is the money that you have coming in and going out each month, year, or other time interval. You already have a cash flow system in place, whether you realize it or not. When it comes to tracking your spending, it's generally best to keep things as simple as possible. We want to help you avoid the time-sink of constantly entering data into an app or a spreadsheet just to see how you’re doing with spending. To save your time, and perhaps your sanity, let's talk through three simple budget tracking options.
Understanding your personal cash flow system and establishing budgeting priorities are crucial to maintaining a system that actually works for you. However, after creating a budget spreadsheet or entering your data into a budgeting app, the question remains: How do you track your spending to ensure that you are consistently adhering to your set budget?
Method #1 - Dual Checking Account Method
🌟 Who this is good for: In my experience, this is a good method for those who are very new to budgeting and tracking their spending, and/or for those who have credit card or other consumer debt, or find themselves constantly overspending.
Using this budgeting method means that you will maintain two checking accounts. Either two accounts per individual in the household, or two joint accounts for couples with fully shared finances. You’ll have one checking account for income deposits and to pay regular bills- those fixed expenses we outlined in your budget and can can exactly quantify (and ideally have paid on autopay). Then on each payday you transfer your spending money- the amount you allotted for discretionary spending in your budget- to a dedicated "spending" checking account. You’ll typically want to fund your accounts after each payday by transferring the right amount of money for your pay frequency (e.g. enough coverage for two weeks, half a month, a whole month). All of your discretionary spending should come from this account moving forward (via cash withdrawal or debit card). Your savings (aka your goal money) would be transferred to debt, savings or wherever your financial plan dictates at the end of each spending period.
With this method, you can easily see how much you have left to spend before next payday anytime by checking the balance of the account. When the money is gone, you know that you’re out of spending money until your next paycheck. If you have to transfer money from savings to cover a shortage, this tells you that you either need to rethink your budget or be more mindful of your spending habits (or both).
Method #2 - Credit Card Method
🌟 Who this is good for: In my experience, this method is best for those who are comfortable maintaining a budget and have consistent everyday spending habits, and who don’t have carried over credit card or consumer debt.
Applying this budgeting method means that you will dedicate one credit card as your “spending” card. Use that card for all of your discretionary spending, and only for discretionary spending. Another card can be used for fixed expenses (ideally on autopay) to make the most of credit card points.
The theory is similar to the Dual Checking Account Method above, where you will always be able to see at a glance how much you’ve spent on that one card. But, of course, it's easy to overspend and there is no hard-stop once you hit your budgeted spending amount. If it helps you stay on top of tracking, you can pay the card balance off more frequently, e.g. each payday, to help you better track your balance during smaller spending cycles.
It is key here to start with a $0 balance at the beginning of each month/cycle and pay it off in full at the end of the month so that you are not occurring any interest on the card. Credit card interest is virtually always toxic debt, i.e. with very high interest rates, and is to be avoided.
A proper budget doesn't restrict you; it empowers you to spend joyfully on what matters while still tracking confidently for your goals.
Method #3 - Pay Yourself First Method
🌟 Who this is good for: In my experience, this is a good method for those who are very comfortable with budgeting and tracking spending.
With this budgeting strategy, you prioritize your goal money over everything else. Essentially, you are "paying your future self" first to ensure that your financial goals are fully funded. You can do this by transferring your goal money each payday to where it needs to go- debt, savings or investment account, etc- and leaving the remainder spending on fixed and discretionary expenses.
Ideally, you pay all upcoming bills right after each payday so that you know that whatever is leftover in your checking account is then available for discretionary spending. If not possible for every fixed bill, you will need to earmark the amount you'll need for remaining bills during that spending cycle, and then you can let yourself comfortably spend whatever is left as you like.
There is risk of overdraft or financial stress with this method, therefore it is one best worked up to over time by consistently building healthy spending habits and comfort with spending with one of the first two methods, eventually incorporating this budgeting method as desired.
Note: automated transfers can be a great tool here to support smooth cash flow to the right accounts at the right times. If using auto-transfers, it is best practice to schedule transfers for a few days after the calendared payday and add overdraft protection to your bank account, just in case there are delays with paycheck deposits, withdrawals, or anything else.
That's It!
These budget tracking strategies are designed to be simple and effective. Once implemented, they should bring you peace of mind and a boost of confidence that your cash flow is doing exactly what it needs to be doing to serve you best.
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