Budgeting and Cash Flow Management

The word “budget,” often evokes a negative reaction for fear it will be restrictive and limit the things we’re able to do. However, a budget doesn’t have to be restrictive to be effective. While creating a budget certainly will not make the top of anyone’s list of preferred activities, it is a valuable financial planning tool. In fact, a well-crafted budget can better identify areas for savings that can lead to more financial freedom.

Creating a Budget

Get started on your budget by identifying a tool for tracking expenses and income. A variety of digital tools are available. In fact, last week’s blog post, Get ready, Get Organized and Take Charge, provides links to some of those tools. If you don’t want to use one of those options, a Microsoft Excel spreadsheet also works well.


Read: Get ready, Get Organized and Take Charge


Once you’ve chosen the best tracking tool for you, start gathering information. If you have been following along with this series, you’ve already organized your information in one place, making this an easier exercise.

Information you need to gather:

  • Bank statements
  • Pay stubs or W-2s
  • Credit card bills
  • Utility bills
  • Loan statements (mortgage, auto, student, etc.)

6 Steps to Creating a Budget

Step 1: Calculate Your Income

Let’s use net income “take-home pay.” This is your income after taxes and deductions for benefits such has health insurance and retirement plans.

Step 2: Create a List of Monthly Expenses

Fixed – debt (mortgage, car payments, insurance, student loans)

Variable – groceries, utilities, entertainment, personal care, dining out, child care, transportation, travel

Step 3: Create a List of Annual Expenses

Property taxes, insurance, homeowners’ association dues, home maintenance, family vacations, gifts

Step 4: Make a Plan

Now that you have a clearer understanding of your income and expenses, create a plan for spending going forward. A typical budget will be broken down into three primary categories: Needs, Wants, and Savings. Many people recommend following the 50/30/20 rule when it comes to making a budget:

Step 5: Make Adjustments to Your Expenses

After creating your budget, you may want to consider making adjustments and seeing where you can make cuts in order to save for other goals. Later on in this blog we’ll address finding “hidden dollars.”

Step 6: Track and Adjust Your Budget

After creating your budget, it is important to track your spending and review it on a regular basis.


Buckets of Money

Now that you have a budget in place, take a look at how to best manage cash. First and foremost, you need to find a system that works for you and that you will stick with. Consider using multiple accounts to manage cash flow. For example, you may want to use one checking account for Needs and set up another for Wants. After that, you might establish savings/money market accounts for other goals such as emergency savings or a vacation fund.

Another great strategy is to split your direct deposits among the various buckets you have established. For example, if your net pay is $8,000 per month, you could direct $4,000 into your checking account for Needs and $2,400 into your checking account for Wants. The remainder should be directly deposited into savings or money market accounts. If your employer only permits two direct deposits, have the larger amount deposited into the Needs account and then establish an automatic transfer to your savings or money market accounts.

Finding Hidden Dollars

After reviewing your expenses for a few months, you may be asking yourself, “How can I free up cash flow for other purposes?” The tips below should help you find hidden dollars and free up additional cash.

  • Review bank/credit card statements for automatic subscriptions and memberships. Subscription-based services (Netflix, Hulu, Spotify, gym memberships, etc.) have become extremely popular, and chances are, like most people you have some that are being underutilized. Cancel the services you no longer use. Even if you plan to maintain the subscription, you can often get a better rate by simply talking with a customer service rep.
  • Review your insurance carriers. Yes, changing home and auto insurance carriers can be an ordeal. However, being willing to compare carriers can often result in some pretty significant cost savings. It is important when comparison shopping to make sure you are comparing similar levels of coverage and not just looking for the lowest cost provider.
  • Take advantage of automatic payment discounts. Some companies offer discounts when you enroll in autopay. For example, AT&T and Verizon offer savings for customers who enroll in auto payments. Some loan providers also offer an interest rate reduction if automatic payments are set up. These discounts are most commonly found in the student loan industry.
  • Plan out major purchases. Major expenses for items like furniture, electronics or appliances can put a dent in a budget. Unless there is an immediate need, waiting for the right season can often lead to large savings on these major purchases. For example, furniture often goes on sale around holidays (Presidents Day, Memorial Day and Labor Day). Check out What to Buy Every Month in 2022 to get tips on the best times to make large purchases.

Thank you for your time this week. We hope you found this blog informative. Next week, join us as we discuss Creating a Personal Balance Sheet. In the meantime, should you have any questions, please feel free to reach out to your Oakworth Client Advisor.


Next Week: Creating A Personal Balance Sheet


Financial Literacy Resources

  • MyMoney.gov — Website run
    by FLEC that provides educational resources, checklists and personal finance calculators
  • takechargeamerica.org — Nonprofit that focuses on credit counseling, debt management and student loan counseling. This website contains a variety of financial tips and calculators.
  • consumerfinance.gov/consumer-tools/ — Website run by the Consumer Financial Protection Bureau. A guide for many commonly asked financial questions.

This document is being provided for informational and educational purposes and is not meant to be taken as specific advice. Oakworth Capital Bank does not provide tax or legal advice. All decisions regarding the tax and/or legal implications of these strategies should be discussed with your tax and/or legal advisors before being implemented.