The Absurdity of Budgeting in the Face of First World Cash Flow Issues

[The White Coat Investor]

I've had a lot of financial advisors tell me they add a lot of value for their clients by assisting with cash flow. I always kind of chuckled at that. What's so tough about cash flow? Well, lately I'm gaining a little more appreciation for it.

The spending amounts on our budget are dwarfed by the various cash flows coming in and out. It seems insane to worry about a $50 expense when there's $50,000 moving from here to there on the same spreadsheet. It came to a head tonight at our budget meeting. Our monthly budget called for us to invest $47K this month. Well, that's exciting. Except I can't find $47K anywhere to invest. So I go over to reconcile it with the spreadsheet that shows the various things our savings is earmarked for- you know, an emergency fund, some various sinking funds, and mostly taxes. Well, the spreadsheet says we're supposed to have one amount, but the amount actually in the account is $29K short of what is supposed to be there, rather than $47K extra. So where's the $76K? Nowhere to be found. Well, except in the checking accounts, where it is mostly earmarked for various other things like business expenses and the WCI scholarship funds etc. It's really a virtual $47K. It doesn't actually exist anywhere except in my future earnings or in money already earmarked for something else.

Bottom line, when we changed our cash flow system to try to make it easier to reconcile the two spreadsheets, we started investing the earnings from the next month while using the earnings from the previous month on the budget, or since money is fungible, investing money earmarked for the taxman and taking advantage of the float I've acquired due to the various tax laws (like the fact that Utah allows you to pay your entire 2017 tax bill in April 2018.) So when this gravy train stops, we're going to be short a month's worth of fat income that we owe to the taxman. I'm not so comfortable with that. But to fix it requires me to hold even MORE in cash (we already have lots of cash), which I dislike, and to hold back investing for a month or two, which I also dislike.

At any rate, I now have new respect for docs and their advisors struggling with cash flow issues. It's easier for me to understand how people end up owing the IRS $150K and having no idea why they don't have it.

[Peds]

Nice problem to have ????

[VagabondMD]

Not sure I understand all of the goings on with that, but I have not strictly budgeted for years.

What I do is place the bigger future expenses (real estate tax, college tuition payments (a new one)), big vacation, car, etc.) on my quicken ledger and my expected income (salaries (over next pay period or two), bonuses, income from imaging center biz, etc.), and it gives me a ballpark idea of what's happening for the next 6 months or so. I do not bother with advance entries less than $10k or so. My checking account balance runs between $50k and $100k, and it all seems to work out okay.

I have written previously about my generous emergency fund, but I have not had reason to tap it for an emergency, per se. I have stashed some of the future college tuition expense in the Ally account, but current projections suggest that I will not need to draw from that stash.

[Donnie]

I agree with Vagabond that I don't fully understand what is going on here, but being $74k short of cash is a pretty serious issue. The issue seems to be in the assumptions you made when you expected that you would have the cash weeks, months, years back. I think you should consider creating a simple monthly projection model that has expected income, expenses, investments made, and a residual cash balance. I would think most of your income and expenses are fairly predictable, so that would avoid this issue in the future.

[hightower]

I have noticed recently with my own personal budget the same problem you're having (only on a much smaller scale).  We have a budget for spending that we try to stick to each month.  On paper when we add everything up we should be able to contribute an extra 4500 to the taxable account, but there's not always enough there for various reasons.  Sometimes it's because we spent money we don't usually spend money such as my sister's wedding gift.  Sometimes it's because our 2nd half year real estate taxes were due.  Sometimes it's because I forgot to pay the utilities last month and paid them both this month etc.  We'll probably be able to make up for the money we didn't have available one month in the coming months by having extra to invest, but still when it happens it feels like we're not doing what we're supposed to be doing.

@Vagabond MD 50k-100k in your checking account?  Wow.  Are you a small business owner?  Why do you need that kind of cushion?

I guess I could see using my emergency fund for keeping up with my investments when I have a month that I come up short, but then I'd have to be constantly filling it back up.  I guess that would technically be okay to do.  I have plenty of credit on 0 interest credit cards to use if I ended up needing my emergency fund before I was able to fill it back up.

[q-school]

I am not a small business owner and I keep more cash than that. Some of it is because we are meeting our savings/investing goals already. Some is for emergencies. Some is for unexpected non emergency expenses.

At some point it's a good problem to have.

[DMFA]

I used to strictly budget.  I just annoyed my wife a lot by telling her she couldn't have this or that, when as it turns out we could still have met the goals.  Now that we have controlled spending habits, it's not an issue, esp now that we make 3x what we did back then.

In my usual bank account app, I have all the scheduled income and expenses pre-programmed in at their usual intervals: paychecks 1/15 or q2wk, mortgage on the 1st, student loans on the 3rd, personal money and insurance bills 1st and 15th, etc.  Usual mundane expenses (dinner, groceries, gas, baby clothing sale at Carter's, etc) just happen as they come; they're irregular and the cushion is big enough to let them happen (retrospective analysis of spending habits over 4 months by expense type).  Then at the end of the month I scrape everything in the routine-use checking account over X amount (usually $2,000) into either taxable or savings to get it out of sight/mind.  I look ahead to make sure we don't ever get close to that on the future amount with all regular expenses in, and if we don't, I don't pay it mind anymore.

Of course, when you take your eye off the ball, foot off the accelerator (brake?), etc is how problems can arise, but I think that hammering in the routine of utilizing discretion before spending takes care of a lot of it.  It also helps that a lot of the expenses are planned for exactly the day a paycheck hits, meaning it's gone before I can misuse it (double-edged sword in case I've already erred, but that should be visible), and that the retirement is all taken out before it even hits the account.

[The White Coat Investor]

Peds wrote:

Nice problem to have ????

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For sure. All my problems are first world problems, but honestly, so are those for just about every reader of this site. That's really all we talk about here. None of us are hungry.

[The White Coat Investor]

Donnie wrote:

I would think most of your income and expenses are fairly predictable

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Now that's hilarious. No. Neither my income nor expenses are fairly predictable. The income is highly variable from every source of income I have. Since the expenses (the largest of which are taxes, investing, and charity) depend more on the income than what I actually spend on lifestyle stuff, they're also unpredictable/highly variable. That's the issue.

[janettebournes]

I'm in awe that you are investing $47k a month. I consider myself a supersaver and yet, still not at that level in terms of how much I have lying around to invest each month

[MaxPower]

I agree with DMFA. We haven't had a strict budget since my wife and I were first married almost 14 years ago. Even then we routinely overspent in certain areas (mostly things like car maintenance and utilities that were completely unpredictable) but we made it work by cutting costs in other areas. Most importantly, we never borrowed to pay for living expenses or anything except medical school, our house, and our van (at 1.9% interest).

We covered living expenses during medical school by my wife's salary and then did the same during residency with my salary while my wife stayed home with the kids. In those 9 years we developed pretty frugal habits out of necessity, and which have mostly made budgeting unnecessary now.

I have all of my 403b and 457 and HSA contributions automatically deducted so that money is never "mine." I have my student loan payments automatically deducted every month as well as my DI payment. I then manually write a check (for DRB student loan) or do electronic payment for federal loan for $5,500-6,000 per month above that. Finally, once I reach a certain threshold in our checking account (usually around $25,000) I either do backdoor Roth contributions (usually in January), or 529 contributions for the 3 kids, or taxable investing every 2-3 months for around $10,000 or so.

Granted my cash flow situation isn't as complicated as WCI's appears to be, but so far this has worked for us. For now I think it's easier since I know that around $6500-7000 per month are going towards student loans. The real rubber meeting the road situation will likely come in the next 6-7 months when student loans are totally paid off and I have that extra cash not earmarked for anything. Will I have the discipline to invest it, or will I increase our spending? I can't imagine making our lives that much better by spending an extra $5,000 per month.

[Craigy]

DMFA wrote:

In my usual bank account app, I have all the scheduled income and expenses pre-programmed in at their usual intervals: paychecks 1/15 or q2wk, mortgage on the 1st, student loans on the 3rd, personal money and insurance bills 1st and 15th, etc.  Usual mundane expenses (dinner, groceries, gas, baby clothing sale at Carter’s, etc) just happen as they come; they’re irregular and the cushion is big enough to let them happen (retrospective analysis of spending habits over 4 months by expense type).  Then at the end of the month I scrape everything in the routine-use checking account over X amount (usually $2,000) into either taxable or savings to get it out of sight/mind.  I look ahead to make sure we don’t ever get close to that on the future amount with all regular expenses in, and if we don’t, I don’t pay it mind anymore.

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I struggle with how much slush to keep.  I know I could be putting more money to work in the market, on loans, etc., but personally I get nervous whenever my checking balance gets much less than $10k.  Just with recurring house note, student loan payment, credit card spending for past few weeks, can easily total $5-$6k depending on the month, so I need a slush a little bigger than that for my peace of mind.  Also if I have something big like a home repair or trip, I don't like to have to move money around to make sure I can write the check or pay the bigger credit card bill at the end of the month.

So you usually scrape off anything over $2k?  And then depend on paychecks hitting before mortgage, student loans, etc?  Do you find you have to move money around and back into the account to pay for this and that?

The baby clothing sale at Carter's is real.   :lol:

 

[The White Coat Investor]

hightower wrote:

I have noticed recently with my own personal budget the same problem you’re having (only on a much smaller scale).  We have a budget for spending that we try to stick to each month.  On paper when we add everything up we should be able to contribute an extra 4500 to the taxable account, but there’s not always enough there for various reasons.  Sometimes it’s because we spent money we don’t usually spend money such as my sister’s wedding gift.

@Vagabond MD 50k-100k in your checking account?  Wow.  Are you a small business owner?  Why do you need that kind of cushion?

 

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I know exactly why he has that amount of money in there because I have the same issue, in both personal and business checking accounts. It isn't a "cushion" in case something bad happens. It's just cash flow. We don't want to bounce checks/payments, especially to people like the IRS. There might be $100K in there one week and $15K in there the next, despite the fact that your family only spends $2-3K a week.

This issue isn't because we have some sort of a spending problem. It's not about budgeting (i.e. stopping spending when you run out of money) so much as cash flow. It's not that we went out to eat twice this week when we should have only gone out to eat once. It's that the quarterly estimated payments are a high five figure amount but got put on a credit card. So while the IRS got their taxes on June 15th for money I earned in April, it doesn't actually come out of our checking account until the 5th of August. So what should you do with the money in the meantime? Leave it in checking? Transfer it over to a money market fund? Invest it according to your investing priorities knowing you're probably going to make money next month and can probably pay the tax bill with that money? (Which is honestly what I think we've been doing.) That works great until the gravy train stops. Then your entire emergency fund goes for a tax bill.

The issue is what do you do when unpredictable but large cash flows start dwarfing the actual budget. I thought I had a good solution this year that we've been using for 6 or 7 months. Then I couldn't find $74K I expected to find (and no, it hasn't disappeared due to some nefarious reason, I checked.) Trust me when I say Quicken and YNAB and Every Dollar aren't designed to solve these issues. I think the solution for us is to simply hold more cash so I can sleep at night, but in essence that means I have all my major cash flows/bills/expenses for the next couple of months already paid in addition to an emergency fund. Which makes even discussing $50 charges on the credit card bill at our monthly budget meeting seem absurd by comparison.

[Donnie]

You (or an FA) really have no way to predict what your cash flow is based on your historical earnings and expenses? Sorry, but I don't believe it. Do you really think your personal income statement is more volatile or complex than Fortune 500 businesses? I can assure you their cash flows are not as relatively off as you suggested yours is on a regular basis. If they are that far off, it is a serious problem.

Taxes, investing, and charity are almost certainly based on some quantifiable metric that you could model, e.g. % of income, cash on hand, etc. I am quite sure I could do it for you, and no, I'm not an FA. I am also pretty sure you could do it yourself, but it would take time and effort.

[The White Coat Investor]

Donnie wrote:

I am also pretty sure you could do it yourself, but it would take time and effort.

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It certainly is. A surprising amount, thus the post.