The ABCs of cash flow planning: F is for Frequency

Every Monday, we look at the ABCs of cash flow management.

Read: The ABCs of cash flow planning

F is for frequency

I chose this word for two reasons: it’s important to identify common, or frequent, financial habits that trigger clients’ overspending. Also, you should help people manage their cash flows frequently to ensure they stick to their cash flow plan.

To do this, you need to help people monitor the following items.

Recurring expenses: The frequency of an expense is connected to how much is spent overall on that item or category. For example, people don’t often overspend on monthly, set expenses such as car insurance. But, the costs of weekly trips to grocery stores or of daily stops at favourite coffee shops, for instance, can easily rise because they’re variable expenses.

Consider someone who spends an average of $170 a week on groceries, for a total of $680 over four weeks. If they decided to go shopping 10 times over that same four weeks instead, they’d probably spend more than $68 per trip. They might make impulse buys or use $170 as their reference point and spend more.

Spending frequency: If your client tries to manage his day-to-day spending by giving himself a monthly amount, he might find it more challenging to control overspending than if he used a weekly budget instead.

The proof

Years ago, I conducted a successful spending experiment. I used myself and a group of clients as testers. Here’s what we found.

If we gave clients a target of spending $2,000 per month, that amount only lasted them an average of 2.5 weeks. In fact, they spent so much that they were on track to spend $41,600 per year or $800 per week.

But, when we gave clients a weekly spending target of $500, they didn’t overspend. In fact, their average weekly spend was on track for $24,000 per year or $461.53 per week.

As you can see, when you work with a client’s cash flow, frequency can make or break the plan.

Continue on to letter G by reading: The ABCs of cash flow planning: G is for Gusto