Money with Your Honey | Part Two: Cash Management

Welcome back! This series is devoted to helping you reach the peace that lies at the intersection of prudent financial planning and healthy communication with your partner. Check out my first article for tips on how to begin the "family finance talk" conversation with your partner. This segment focuses on a foundational piece of every financial plan, Cash Management.

Last time, I likened financial planning to a marathon (don't worry, developing a solid financial plan is way more attainable than running a marathon). Ask any marathoner, the most important part of their race is the training they did beforehand. Think of Cash Management as the training that enables you to get in (and stay in) the race. It's the first area that you and your partner need to address when organizing your financial plan. Cash Management is your foundation. If it's not there, you and your plan trip and fall continuously, never making any real progress. Starting anywhere else is like trying to run before you know how to walk or building a home on sand. Here's what I mean by Cash Management:

Healthy Cash Flow, and
Emergency and Expense Planning

The theory behind these areas is very simple, but in practice, most everyone struggles here. It just so happens that Cash Management is also the least funpart of financial planning (even for a financial planner!). I meet with hundreds of households each year and this isthe most common area folks struggle with and/or ignore because it's difficult for us to answer for our own frivolous spending habits. Owning up to your partner can be hard and we tend to get defensive, especially when they aren't communicating in a loving way. While others struggle with the mechanics of tracking expenses and the time it takes. There's a concrete side of things (the facts and figures of our spending) and a soft side (how we interact with our partner). Let's get to it:

Rule #1: Track what you do spend and spend less than you earn.

Groundbreaking, right?

The first step is to get an accurate idea of what you (and your partner) are spending on a monthly basis. Go through bank statements or use an automated tracking service like Mint.com to help you categorize your spending. There will be necessary expenses (housing, utilities, groceries) and discretionary spending (eating out, shopping, gifts, etc.). Chances are, you will be surprised by where your hard-earned dollars are going (eating out and shopping are often the biggest culprits).

Compare those expenses to your monthly income and you will either have savable income or a spending deficit. Your monthly income needs to be higher than your monthly expenses. Your goal should be to reach a budget surplus and to improve that surplus by increasing income and/or reducing expenses.

Next, set spending goals for categories you can control. These tend to be discretionary categories which also tend to be the most fun. But don't completely deprive yourself (or worse, your partner) of anything otherwise you will rebel against your plan. My advice is to start somewhere and grow. Cut cable and use Internet TV instead, mow the lawn yourself, bring your lunch to work, set an eating out budget lower than what you've been spending, etc. (email me for the simple sheet I use with every one of my clients to track monthly spending and spending goals).

Now you have a way to track your spending, understand your budget surplus or deficit, and have set goals for multiple spending categories. But it's all on paper until you start living up to those goals that you set. You two are a team and need to help each other stay diligent and hold each other accountable to the goals you set. Check out my conversation starters at the end of this article.

Rule #2: Have at least three months' worth of expenses saved in cash PLUS any large expenses you foresee in the next 24 months.

An "emergency reserve" is savings set aside for the express purpose of covering unexpected expenses so you don't go into debt (think job loss, transmission failure, replace an A/C unit, medical expenses, etc.). Having an "emergency reserve" is like owning a free insurance policy because it helps prevent you from going into toxic consumer debt when the unexpected happens. Trust me, the unexpected will happen. When it does, I don't want you to be part of the 46% of Americans that would be unable to cover an unexpected $400 emergency (Federal Reserve, Report on the Economic Well-Being of U.S. Households in 2015). Three months' worth of expenses gives you time to look for a new job and in the case of a disability or illness, most long term disability coverage starts paying after 90 days of being unable to work.

But one of the largest benefits of having an emergency reserve is the reduction in stress that comes knowing you can care for your family. A lack of savings can be stressful which inevitably impacts your relationship.

Don't get down if you don't have an emergency reserve yet. By now you should know what you spend each month and you have reduced spending so you have a budget surplus. Whatever the size of that surplus, I recommend creating an automated savings plan that moves funds directly into savings for you. Ideally, you do this through your payroll system so that the money doesn't even hit your checking account. That's one less decision to make and one less area that requires your discipline. Start by setting the goal of saving $1,000, then one month's worth of expenses, then two months' worth, etc.

Note: these funds will not grow like they might if they were invested, and that's alright. The purpose of your emergency reserve is to prevent you from going backwards into debt. Your emergency reserve is your safety net that allows you to focus on all other areas of your plan. You should make sure that these funds are liquid and available to you if you need them (i.e. don't invest your emergency reserve!). If you're like me and want to maximize the earnings and maintain access to your savings, consider using FDIC-insured online savings accounts because they can pay a higher yield than most brick-and-mortar banks.

The concrete side of cash management isn't rocket science. The hard part is communicating and working with your partner to follow through. Here is how I recommend addressing the "soft" side or emotional aspect of the conversation:

Schedule a regular time to have "the talk": I recommend weekly or bi-weekly. Consider doing it outside of the home in a neutral place. If you're as busy as my wife and I, have a backup time, too.
Have a process: Have your monthly budget handy and look at spending in the last week. How did that week's spending compare to the monthly budget? If your eating out budget for the month is $150 but you've spend $100 in the first week, talk about how you're going to stretch the remaining $50 for the rest of the month.
Establish rules: First off, these conversations need to be honest but judgement-free. Since you've tracked expenses, you can focus on the facts and tell your partner how they make you feel. That's right guys, time to get in touch with your feelings. Your partner will hear "you spend too much shopping" differently than "when you went $150 over our shopping budget, it made me feel like you're not committed to our goals".

Think about other rules that will help make this conversation more enjoyable, too. For instance, my wife and I need to hold hands and be affectionate so we don't come off judgmental. Then after our talk, we go for date night (that we budgeted for, of course!)

I've created some conversation starters for you to help learn about your partner:

Does our financial situation cause you stress?
Where does our financial situation rank on your list of priorities?
What discretionary spending is the most important to you? (coffee, sports equipment, golfing, etc.)
We currently spend $____/month on _______. Can we reduce that while still allowing you to enjoy it?
Do you realize that when you overspend on __________, it makes me feel _________?
What are your thoughts on how much we should have in savings?
What areas are the most difficult for us to track? (eating out, shopping, etc.)
How can I make you feel comfortable sharing about finance?

I understand that this may not be exciting to you and it takes time tracking expenses, setting goals, reviewing progress, etc. but it's an investment in your partner and your relationship. Financial stress is consistently one of the leading issues in relationships. Don't let that be true for you. Use these ideas on how to have "the talk" as a starting point and you will figure out what works for you. But remember to pay attention to both the concrete and soft sides of financial planning and to love your partner while doing it.

Look out for the next post for insights on how to manage debt and how to love your partner while doing so. Feel free to comment or reach out to me with questions.

Written by Justin Rodriguez

Justin is a financial planner born and raised in Phoenix, AZ. Justin’s passion lies at the intersection of personal finance and people. He works alongside individuals and families to help them make prudent financial decisions so that they can have peace about their finances and become truly financially independent. He's happily married to his wife Allison