I minored in management, one of the simple but big ideas I came away with was that notion of optimizing for "cash flow" (i.e. income minus expenses) can sometimes be more important than profit alone, ie staying cash-flow positive (not underwater) every month as opposed to just at year end.
Turns out this idea is pretty powerful in personal budgeting too. I have a Google Sheets document with these columns (item + months):
Item|1|2|3|4..|11|12|Year
And I split the item categories into Income, Expenses, and Once-off expenses. I put all my recurring inflows into income, recurring outflows into Expenses, and Once-offs is a free form where I enter non-recurring purchases like a new computer or such.
On top of each month column I carry over the previous month's net income, then add income minus expenses minus once-off expenses. This is "cash flow". The goal is to aim to be cash-flow positive every month, and also to maximize the year-end net income -- which then gets invested or carried over to next year.
It then becomes a game to try to optimize the year end net income by doing course corrections every month, while maintaining a non-negative monthly net income.
(incidentally this is also how many businesses are run; well the conservative ones anyway)
I've used MS Money and their "cash flow forecast" for just this style of budgeting for close to 20 years now. The software was discontinued 5 years ago. No app since has had as good a cash flow forecast. I admit it's a crutch at this point. So I'm going to have to build my own replacement.
I've got something similar driven by a data entry sheet where I put transactions. The monthly columns populate by sumifs()'ing off of that sheet.
I just started my third calendar year of this system on January 1st. It's working out pretty well. I like it more than an off the shelf budget app because I can customize it however I want. I use to keep track of other things like the last time I vacuumed my apartment.
Nice. Yes, I handrolled my spreadsheet because I knew exactly how to create the tightest possible effective interface for my use patterns, but I know a lot of my friends struggle to do that so they buy financial software. To each their own I say. I will say the major advantage of spreadsheets is they let you easily run what-if scenarios and see the results update live, which really helps you to visualize if you can better afford a new car in July or October (same spend, different cash flow scenarios).
My inspiration is actually not from accounting or finance, but a simple mass balance equation:
In - Out = Accumulation
Just keep the accumulation positive every month (constraint), and maximize it at year end (objective function).
Also I don't track spend below a certain dollar value. I know people like transaction-level granularity (every chocolate bar, every cup of coffee), but me, I just set aside a monthly buffer for incidentals and forget about it.
Some financial journalists make a big deal of how much you can save by not buying that cup of $2.75 Starbucks coffee every morning, but at my income level it's a rounding error not worth sweating over -- I'd rather focus my time increasing my topline growth i.e. learn and grow into positions with more responsibilities.
(But I also get free coffee at work so there's that :)
Comments
I minored in management, one of the simple but big ideas I came away with was that notion of optimizing for "cash flow" (i.e. income minus expenses) can sometimes be more important than profit alone, ie staying cash-flow positive (not underwater) every month as opposed to just at year end.
Turns out this idea is pretty powerful in personal budgeting too. I have a Google Sheets document with these columns (item + months):
Item|1|2|3|4..|11|12|Year
And I split the item categories into Income, Expenses, and Once-off expenses. I put all my recurring inflows into income, recurring outflows into Expenses, and Once-offs is a free form where I enter non-recurring purchases like a new computer or such.
On top of each month column I carry over the previous month's net income, then add income minus expenses minus once-off expenses. This is "cash flow". The goal is to aim to be cash-flow positive every month, and also to maximize the year-end net income -- which then gets invested or carried over to next year.
It then becomes a game to try to optimize the year end net income by doing course corrections every month, while maintaining a non-negative monthly net income.
(incidentally this is also how many businesses are run; well the conservative ones anyway)
I've used MS Money and their "cash flow forecast" for just this style of budgeting for close to 20 years now. The software was discontinued 5 years ago. No app since has had as good a cash flow forecast. I admit it's a crutch at this point. So I'm going to have to build my own replacement.
I've got something similar driven by a data entry sheet where I put transactions. The monthly columns populate by sumifs()'ing off of that sheet.
I just started my third calendar year of this system on January 1st. It's working out pretty well. I like it more than an off the shelf budget app because I can customize it however I want. I use to keep track of other things like the last time I vacuumed my apartment.
Nice. Yes, I handrolled my spreadsheet because I knew exactly how to create the tightest possible effective interface for my use patterns, but I know a lot of my friends struggle to do that so they buy financial software. To each their own I say. I will say the major advantage of spreadsheets is they let you easily run what-if scenarios and see the results update live, which really helps you to visualize if you can better afford a new car in July or October (same spend, different cash flow scenarios).
My inspiration is actually not from accounting or finance, but a simple mass balance equation:
In - Out = Accumulation
Just keep the accumulation positive every month (constraint), and maximize it at year end (objective function).
Also I don't track spend below a certain dollar value. I know people like transaction-level granularity (every chocolate bar, every cup of coffee), but me, I just set aside a monthly buffer for incidentals and forget about it.
Some financial journalists make a big deal of how much you can save by not buying that cup of $2.75 Starbucks coffee every morning, but at my income level it's a rounding error not worth sweating over -- I'd rather focus my time increasing my topline growth i.e. learn and grow into positions with more responsibilities.
(But I also get free coffee at work so there's that :)