Money cycles

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

Financial planning deals with decisions that relate to present and future stages of life. In order to put it in context, some theorists look at the life cycle as a context for making decisions and developing rules of thumb. For example, an investment choice that can be related to the life cycle is the rule of thumb of investing 100% – your age (eg. 100% – 60 = 40%) of your portfolio in bonds. (Disclaimer: this rule isn’t appropriate for everyone.)

There are also shorter cycles that occur. For most of us, our day-to-day life is built around cycles of a day, a week, a month and a year. As anyone who has worked toward a multi-year goal can attest, breaking it down into chunks that fit the shorter cycles makes it more manageable. As an example, I have a goal of being able to cycle 40 kms in 1:15 by September 2013. I don’t refer to my year-long plan to reach my cycling goal. Instead, I have a weekly workout schedule and a monthly workout plan. As I achieve my weekly and monthly targets, I know I’m on track to reach my goal for next year.

The same is true in financial planning. Because most people get paid twice a month (or every two weeks), it makes sense to match mortgage payments and saving to the same cycle. For example, if a person were paid twice a month (on the 15th and last day), it would make sense to have a mortgage payment automatically withdrawn on the following day and to have savings automatically withdrawn at the same time. This would mean more frequent mortgage payments (for many people), but it would smooth out the amount available for spending. Increasing mortgage payment frequency to every two weeks (26 times per year) makes the most sense if that matches the frequency of a person’s paycheque.

Saving regularly avoids the pitfall of having no money left at the end of the month to save. It also allows a person to spend everything that’s left, because the savings were already made. That’s what it means to “pay yourself first.” Saving a little bit of money, more frequently, is far easier than trying to accumulate money in a spending account and saving it once a year.

It may be possible to fit other spending to monthly or twice-monthly cycles. For example, I can have my property tax charged monthly instead of yearly. I make insurance payments monthly. I have tried to coordinate these additional payments so some are at the beginning of the month and others at the middle. This way, my spending is relatively consistent, much like my saving. The result is that any irregular spending or one-time purchases must be planned and undertaken consciously, not impulsively.

How do you control your cash flows? Does your debt repayment, spending and saving fit the same cycle as your earning?

3 thoughts on “Money cycles”

  1. When I was working, the only regularly large bill which was not a monthly one was my car insurance (semi-annual). I would have to make sure I did not invest any surplus from the previous month because I needed it to cover this expense. If I bought something expensive on my credit card (rarely), I would know about it at least 3 or 4 weeks before the bill came in, so I could make sure I had enough money around to pay it off (never carried a balance).

    Bills like those would allow me to pay them in installments but included a fee for not paying them in full (i.e. interest on a CC or a processing fee for the car insurance, for example). I always considered those fees a waste of money so I was always sure to avoid them.

    Now that I am retired, I get paid monthly, not biweekly, so I have had to monitor my smaller cash flow more carefully. I also have more non-monthly bills than before such as health insurance and estimated income taxes, both quarterly. With my investment income lower than my former wage income, I sometimes have to store up previous surpluses for 2 or 3 months because those large, nonmonthly bills are due in the same month.

  2. I like the point about balancing out payments by paychecks to get a nice, even cash-flow. I discovered this myself when I first bought a house. My wife and I found that at after the end of the month, we just barely had enough cash to get by due to having several big-ticket items come due at the month end; mortgage, auto-mated savings, insurance, etc. And that for the second half of the month, we were good – and tended to be a bit less careful when we had excess cash (I was paid twice-monthly).

    I found a good trick for this was to move all of savings withdrawals to the mid-month to even the total dollar value paid out a mid-month and month-end on those big-ticket items. It’s worked well for us.

  3. I have tax and insurance bills that come once a year, so I save a set percentage of my income every month in a separate account to cover those expenses since they are due on the same dates every year. Everything else is monthly and can be easily covered by paychecks as they come in.

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