There’s a lot of information available on strategies and insights for your long-term money. One area I’ve found that is overlooked is short-term money management. It may not seem as exciting as long-term money management, but is just as crucial in your overall financial plan. Throughout this article, you’ll learn about budgeting and cash flow, accounts for your short-term money, and short-term investment strategies.
At the base of your financial plan is your cash flow – how much money you have coming in and how much money you have going out. To maximize your finances, it’ll benefit you to have a good understanding of your cash flow. A couple of strategies you can use to better understand your cash flow are tracking your income and expenses as well as creating a budget.
To track your income and expenses, you can utilize technology to automate this process, or you can do it manually by updating a spreadsheet periodically. Once you have a good idea of your cash flow, you can put in place a budget. I like to remind people that a budget is just a tool to create awareness, it is not an end-all be-all for how you have to spend your money. By creating a budget, you’ll have a better idea of how much you can afford to spend in various categories, and it’ll create clarity for your money decisions in the future.
If the traditional idea of budgeting does not excite you, then you can try reverse budgeting. This approach is different in the sense that instead of allocating your income to various spending categories up front, you prioritize your saving and investment goals first and then spend what’s left over. I’ve found that individuals who reverse budget have less guilt when they spend money because they have already taken care of their saving and investing goals.
Once you’ve understood your cash flow and developed a budget, the next aspect of your short-term money plan will be to determine where to put your short-term money. I’ve found it helpful to utilize multiple savings accounts that each have a purpose. A few that I recommend are an emergency fund, sinking fund, downpayment fund, vacation fund, and car fund.
To take a deeper dive into each of these accounts; the emergency fund is used to keep 3-6 months’ of expenses in the account for when an emergency arrives. The sinking fund is used for items like annual insurance premiums and home repairs. The downpayment fund is used to periodically save for a downpayment on a home. The vacation and car funds are used to fund larger purchases – in this case, a vacation or a car throughout your lifetime. The benefit of these separate savings accounts is that by giving the money you save a purpose, it can help you be more intentional with how you save and what you spend your savings on.
With the recent rise in interest rates, it has been more costly to borrow money for a home or car. Although the cost to borrow money is higher, you can still benefit from the rise in interest rates. With the rise in interest rates, banks are now paying higher interest on savings accounts, allowing your savings to grow at a faster pace. You can also open up a high-yield savings account that pays a greater interest rate than a traditional bank account.
The yields on fixed-income investments such as corporate bonds, municipal bonds, certificates of deposits, and Treasury securities have also increased. This can be an efficient place to park short-term money so it is not fluctuating in the market but is still potentially earning a return on your investment. It also helps you to protect the purchasing power of your dollar despite inflation. These fixed-income investments can allow for more risk-averse investors to still get an attractive yield on their investments.
By honing in on your cash flow, utilizing intentional saving accounts, and being efficient with your short-term money, you can pave the way towards your long-term financial goals.
-by Jacob Young, AAMS®
Financial Advisor, RJFS
313 East 10th Ave. • Bowling Green, KY 42101 • Phone: 270-846-2656
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