Imagine for a second that you receive a surprise $100. Maybe it is a gift, bonus, or money received from some work you did on the side. Do you know what you are going to do with that money?
Would you pay down debt? Or maybe even invest the money?
More than likely, if you are like most people, that money will be spent on whatever desire pops into their head without much thought of how the extra money fits into their overall plan.
It doesn’t need to be that way.
You can create a plan for “extra” money so when it hits your wallet, you already know what you plan to do with it.
When you get down into it, personal finance as a concept isn’t that difficult. It doesn’t matter if it is budgeting, saving, or investing, personal finance boils down to being intentional with your money. That includes all the money that comes into your life. It doesn’t matter if it is your normal paycheck or the birthday check you receive from your parents.
So how do you be more intentional when it comes to money you receive? Well, that is where a cash priority plan comes into play.
A Cash Priority Plan is the pre-determination and order of how you will utilize additional money before you actually receive it based on your goals.
So how does it work? Imagine that you have $10k in student loans that you want to pay off as soon as you can and a Roth IRA you hope to fund this year if your loans are paid off. Your cash priority plan would look like this:
It is that simple. With this simple plan, you have now established the expectation for yourself that any extra money that you receive will be applied in that order.
One thing that constantly trips people up when they receive extra money is that it is just that, extra. It is money they didn’t plan on so they want to use it to fund some of the things they have given up or pushed off. Instead of using it to help with their goals, they want to use it to go out with friends or a road trip.
That is the beauty of utilizing a cash priority plan – you can build whatever you want into your plan.
Being intentional with your money doesn’t mean you can use money to enjoy things. It is just the opposite. Being intentional with your money helps you cut the shit out of your life so you are spending money on the things that provide you the biggest benefit and the most joy.
So, let’s take the example we used above. You have $10k in student loans and want to fund a Roth IRA. However, you also want to take a road trip this summer to visit some friends. You can utilize your money plan to help save for this trip and keep the impact of your month to month progress on your goals to a minimum.
With one little addition, you are now allowing yourself to enjoy some of the extra money coming in, while still making progress on your goals.
When we were paying off our student loans, we utilized a cash utilization plan as well. During our big push over the final 18 months of our loans, we utilized a plan similar to example #2 above. We wanted to travel a bit before we had kids while also wanting to get our student loans paid off. So we used a money plans to dictate ahead of time how we would utilize additional funds that came in to achieve both of these items.
For every dollar that came in, 50% was put towards our travel fund (which eventually funded our trips to Sanibel Island, FL and St. Louis, MO) and applying the rest as payments to our student loans.
Now that we are past paying back our loans and no trips in the immediate future, our plan is mainly focused on savings. It may change slightly from month to month depending on things we want to do but for the most part our cash priority plan is focused on various saving buckets.
Our Current Cash Utilization Plan:
Taking the time to put together a plan before extra money comes in helps keep us intentional with our money decisions and help us not spend the money on something that isn’t important to us.
Want to Make Your Own?
Do you want to make your own cash priority list? Print out a blank plan and list out the order that money should be applied, according to your goals, when extra money is received. Hang it somewhere highly visible so you make sure you follow it!
Personal finance comes down to being intentional with your money. It doesn’t matter if that money is your normal paycheck, a side hustle, or a gift. A cash priority plan helps you be intentional for the money that comes in that you aren’t expecting.
Do you plan out how you will utilize money before you receive it? Have you ever used a cash priority plan?