Smoothing Out The Cashflow

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Even though I track our net worth monthly, it can be difficult to determine exactly how well we are building our wealth due to large recurring expenses we have that do not bill on a monthly basis. For example, we may have saved up $1,000, but if it happens to be time to pay our insurance dues then all that may be gone. Also, our savings in later months will then be inflated. So I am going to try and smooth out these bumps by creating an account to send monthly payments too in preparation for an upcoming bill. So instead of a $600 bill in 6 months, I will put away $100 a month into a high-yield savings account and pay off the bill when it comes due with no spikes in our net worth.

First, I need to make a list of all the expenses and their billing interval:

Auto Insurance – Semi-annually
Renter’s Insurance – Annually
Water/Sewer – Quarterly
Phone – Annually (SunRocket VoIP)
Tuition – Quarterly

After adding these up and finding the average monthly bill, I just set up an auto-debit every month for that amount to an account that I won’t add into my net worth goal. I’ve been meaning to do this for a while, thanks to commenter Matt for reminding me in my last update.

Hopefully this extra trouble will help me better visualize our monthly expenses and help us better plan and save in the future.

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  1. I don’t think it is a good idea. You are modifying your behavior so your chart looks better. Kind of defeats the whole purpose of tracking your spending.

  2. Not sure if I’d go to all the trouble to set it up. My budget spreadsheet shows the months with $0 spend in a category and shows a budgeted amount saved. It’s not smoothed out across the year, but that diesn’t bother me.

    Accrual accounting (essentially what you’re setting up) is a real pain for home and small businesses – that’s why most use cash accounting.

    But, it’s not a bad exercise if you have the discipline to not grab that money when you need a spare $50.

  3. Another Bill... says

    That’s exactly what I have done to account for our large expenses. I set up a couple of sub-accounts with ING and have one big transfer from my brick-and-mortar bank to ING each month, and then 3 transfers from my ‘savings’ account at ING into each of the sub accounts. As you already know, ING’s interface makes it easy to set up recurring transfers by automating the process.

  4. I second Bill – sounds like you are going to a form of accural based accounting method. You don’t to move money around to do that – just track your accruing liabilities. Look in MM’s archives, his records are the best personal finance blogger example of this that I have found.

  5. I think if you’re just doing it to make your charts better, it’s not worth it. But I have thought of doing this, too, just to make sure I have the money on hand when these big bills come due. That way I don’t have to fit an extra several hundred dollars into my monthly expenses during a month when other factors might already be making me feel strapped. Our income fluctuates somewhat, so it would be nice to know that those insurance premiums have already been paid and are placidly earning interest until they’re needed.

  6. I set up two subaccounts at ING. One pulls money monthly for my property tax and insurance and the other pulls money for annual bills. The segregation of savings really makes it easier to track what is going on in your accounts. I actually squirrel away a little bit extra in each account just in case someting unforseen develops -like a spike in property taxes.

  7. I would vote against it. As a CFO, accrual accounting is used in business for many reasons vs. cash accounting. However, I get paid to do that. To do accrual accounting at home would not provide any benefit to my net worth – it would just suck up my valuable time. If anything, I put forth that it opens you up to making a mistake somewhere down the line and incurring a possible late fee.

    As with anything, does the action improve your life or net worth?

  8. Claire, as to your comment that you wonder if you’ll have the money to pay a bill: I use the Quicken Calendar feature for that. All my bills are scheduled years ahead. Using the calendar view I can select which accounts to include in the calendar display – typically all my cash flow accounts. The graph at the bottom then shows as positive or negative for each day.

  9. Wow, what a great discussion. I agree with Wes. “Does the action improve your life or net worth?”

  10. This is hardly accrual accounting. He’s simply pulling money out of his calculation that really is “gone” anyway. I don’t think it’s to make the charts look better, it all nets out in the end anyway. Plus, he’s getting some interest he wouldn’t otherwise have gotten, so it’s improving his net worth, as the previous comment mentioned.

  11. I forgot to mention that once this is set up, it really requires no extra time. Automatic deposit is set up easily, and automatic withdrawal can be set up just as easily as well. It’s total wash once the initial setup (30 minutes maybe) is done. Make sure you keep in mind the lag for getting your money once the automatic withdrawal (from your HY savings account) is set up!

  12. Yes this is a weenie version of accrual accounting. The charts aren’t a big deal, but this way in the future when I don’t have so much cash on hand I can better plan how to put away money in other investments.

    Hmm… doing it “virtually” on an Excel sheet might be a good alternative. Maybe I’ll try that first.

  13. I do something very similar. I do not count as part of my networth what is on my checking account (which varies wildly depending on the month and expenses needed that month).

    I pay myself first as soon as I get paycheck. But also, I periodically sweep money out of the checking account into investments, and it nevers comes out of them again (until retirement).

  14. I don’t see this as accrual accounting or pumping up net worth…simply setting up what I call a spending account which is earmarked for big ticket recurring items. That way the funds are available when the bill comes due.

    It may not be for everyone, but if it works for you, then great!

  15. Accrual Accounting also takes into affect ‘Accounts Recievable’, inventories and such, and incorporating those.

    This is actually how I set up my accounts, I know that my schooling is going to cost me about 170 every week. So I place this amount in an ING account through automatic deposit. What this does is smooth out the bumps up and down, and *ACTUALLY* helps you figure out how much you ‘really have’ to spend on a week to week basis. Most people do not really have the memory to remember when exactly everything is due and for how much when it’s more than a month away. This accounts for that and allows you to ‘forget’ it in a way. It also allows you to better budget for week to week expenses to determine what you really want to keep.

    Things such as Escro accounts do this exact thing for you (for property taxes). Most are required by banks for the reason listed above. There is no change in his actual Net Worth, other than instead of seeing spikes in Net Worth he will (and so will we) see a more consistant pattern of his Net Worth, and can then better determine the real trends of his growth.

    Consider this like your Town/City, they try to even things out over time, so they curb the spikes. If they didn’t do this, imagine one year finding out your tax bill jumped 50% to cover a bond that matured, and the next half-year, because the municipal got another bond, it dropped 33%. Instead of over the two half-years keeping the same rates, you would be hardpressed and looking to move, or do something to ‘correct’ it when there really was no issue, it’s just that your timing was off slightly.

  16. This is off topic, but with Citi 0% APR BT cards they send you BT checks (3 of them). If I were to write the checks to myself. Would that be considered defaulting and therefore it would not be 0%? Jonathan have you tried it?

  17. The setting up of accounts like this is a great idea (ok, I may just be biased since I do this myself), but I wouldn’t do it as a net worth chart-smoothing exercise. Right now, I’ve got six subaccounts setup at ING automatically getting transfers for a variety of quarterly/annual bills (i.e. an Auto account for insurance & registration expenses). I wouldn’t put that money outside of my net worth though, just as I wouldn’t put the portion of my salary going towards my mortgage payment outside my net worth. Just because that money is destined for covering a known bill doesn’t mean it’s not contributing to my net worth.

    Besides, a smooth, constantly rising line is boring… there’s learnin’ in them thar’ valleys! 😛

  18. I agree with your concept, but not because of charting. You can just as simply fit your monthly data to a curve, and the “bumps” will dissappear over the long-term.

    My wife and I use the following methodology:

    First, we determined all of our monthly expenses (bills, savings, short-term savings). Once we get our pay check, a certain amount of money is automatically deducted from our individual accounts, and transferred into a joint. The money in our individual is for whatever we like. The money in the joint is then used to pay monthly bills, automatically transferred to a long-term savings, or automatically transferred to a short-term savings (for car repair, vacation fund, xmas fund, wedding gift fund, bday fund, etc). If the short-term fund grows too large, I might role some into the long-term savings.

    I believe this has helped us budget our money, and has prevented us from dipping into our savings.

    But don’t pull your extra account out of your tracking system. It is important to track everything — including irregular payment patterns.

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