If you want to meet your financial goals, the thinking's been that you need to have a budget.
But that may not actually be the most effective tool, advisors say.
"Budgeting is really about looking back at past mistakes," said Andrew Sivertsen, a certified financial planner at The Planning Center in Moline, Ill. "Cash flow is a more dynamic conversation, … a vision for the future."
Sure, it can seem a little "you say to-may-to, I say to-mah-to." Good cash-flow strategies accomplish many of the same aims as a budget. But they do it in a way that makes it easier to adjust for current expenses and income fluctuations and to plan ahead, Sivertsen and other advisors said this week at the Financial Planning Association BE conference in Seattle.
They can be an important tool for consumers of any income, said presenter Marty Kurtz, a certified financial planner and president of The Planning Center. The more you make, the more you spend—and the more likely you are to have "missing money" that could be better allocated, he said.
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He recommends dividing expenses into three buckets: static, control and dynamic (or, roughly, past, present and future). The aim is to work the first two in such a way that there's room to fund the dynamic bucket of future needs and wants, from travel to college tuition.
The static bucket represents fixed expenses like mortgage payments and insurance, which are relatively easy to predict, Sivertsen said, and may be easier to reduce than other expenses. (Re-shopping an insurance policy, say, can have powerful effects.)
Toughest to wrangle is the control bucket, which represents current and variable needs,including gas, groceries and entertainment. "We're trying to take control of these expenses," Sivertsen said.
It can be more effective to set an overall weekly budget for such variable expenses rather than assign a particular amount for line items like groceries and entertainment, Kurtz said. That gives you the flexibility to prioritize—you can take a yoga class this week, for example, and go out to dinner with friends the next.
"My clients use Mint.com a lot," said seminar attendee Francine Duke, a Chicago-area certified financial planner and owner of Aqua Financial Planning. Although she said she has mixed feelings about some of the site's reports, finding expense-tracking software a client will use can help them make great strides in meeting goals. "Cash flow is absolutely critical," she said.
Some people could also benefit from a fourth bucket. For freelancers and others with uneven income, a "feeder" bucket might be a separate bank account that can be tapped for occasional transfers into your main checking account to smooth out incoming cash flow to fill those static and control buckets, Sivertsen said.