Many business owners and incorporated professionals find it hard to properly structure their cash flow and this means they end up paying more tax. This decreases their ability to allocate cash towards their goals and prevents them from achieving what they want in life.
In this article, we are going to explain how to structure your cash flow and get a clear picture of where your money is going.
3 Steps To Proper Cash Flow Planning
1. Do a full inventory of your spending
There are many websites and apps you can download to help you with this process, or you can even use a simple pen and paper. After you’ve recorded all your expenses, make sure you remove any of those expenses that are being paid for from your corporation.
2. Eliminate the corporate expenses from your cash flow plan
Take a look to see if there are other expenses you could be paying from your corporation. Paying expenses from your corporation saves you money because you’re paying with dollars that have been taxed at 11%, as opposed to your personal tax rate. Life insurance is an example of an expense that should always be paid from your corporation.
As a side note, be sure to make your corporation the owner and the beneficiary of any life insurance policies.
If you’re unsure of what expenses can be paid through your corporation, reach out to your accountant for some guidance.
3. Separate your committed expenses from your spendable expenses
Committed expenses include your mortgage, or rent, gas, heating, hydro, internet, cable, etc. These are expenses you must pay each month, but that you’re never going to emotionally overspend on. What we mean by that is that you’re not going to have a tough week at work and decide to go buy a bunch of gas, or overpay on your cable bill. For the most part, committed expenses remain consistent month-to-month.
Spendable expenses are items people tend to overspend on in relation to their emotional state. Those are known as active expenses such as groceries, dinners, movies, spin classes, etc. For example, if you’ve had a long week at work, you may go out for dinner and spend a lot more on food and alcohol than you had planned for.
How much should you allocate to Committed and Spendable Expenses?
Typically, you want to commit about 50% of your net income to committed expenses, 25% net income to spendable expenses, and the final 25% of your net income we recommend you allocate towards your goals.
If any of the goals you’re allocating savings towards are more than a couple of years out, keep that savings inside the corp and decrease that dividend that you’re paying yourself by that amount. It is very important to note that although the percentages we’re recommending are just that. If you feel that your spendable expenses are too high, or too little, adjust as needed.
Pay With Cash To Build Better Spending Habits
The goal of structuring your cash flow is to become more aware of where your money is going and to ensure that you’re getting what you want out of your money. It is also to ensure that your cash is being spent on your goals, the things you love, and helping you build the life you want.
To help build the habit of sticking to your allocated spendable cash, one tip we strongly recommend is to pay these expenses with cash for at least a couple of months.
Calculate what your spendable amount is for each week, choose the same day every week, and go and withdraw that amount from your bank. I promise you will become more aware of how much you’re spending when you consistently pay with cash. You’ll notice, for example, when you pay for a $300 dinner with cash, as opposed to your credit card, there is a significantly different feeling associated with how much that dinner costs.
You’ll miss out on accumulating credit card points for a couple of months by paying for more things in cash, but the value of developing and adhering to your cash flow plan will far outweigh any points you may have missed out on. Once it has become a habit people manage to go back to using credit cards, but others tend to stick to cash. If you find yourself falling off, go back to spending cash for a couple of months to get yourself back on track.
Quick Tips For Managing Your Cash Flow
To help you better manage your cash flow, here’s a summary of our top tips to help you get clear on where your money is going:
- Complete a full spending inventory
- Separate your spendable and personal expenses
- Pay for as many as expenses you can from your corporation
- Separate your committed and spendable expenses
- Save for your short-term goals outside the corporation and your long term goals inside your corporation
- Aim to allocate the same amount of cash per week to your spendable items (typically around 25% of your net income)
- Try using cash for 60 days to develop the habit of adhering to the same weekly spending
If you want to learn how to make a cash flow plan and get clear on where your money is going, visit our Contact Page to get in touch with us and we’d be happy to run you through our full financial Blueprint process.