Many of us think about our budget - income minus expenditure, that's fine. But we prefer to have something left over to invest. But if you don't want any surprises in the long term, you need to think a little further ahead. Liquidity planning is the magic word. It sounds more technical than it is: it's simply about knowing when you need how much money - not just today or this month, but also in six months, next year and in five years' time.
What is liquidity planning?
In short, it's a plan that shows you how your cash flow will develop over time. You record your monthly income and expenditurebut also one-off or irregular coststhat may only be incurred once or twice a year - for example taxes, health insurance premiums or vacations. And you think about what capital requirements you will need in the future: What's coming up? A car? Relocation? Further training?
The goal is simple: you want to remain solvent at all timeseven when major expenses are on the horizon - and at the same time avoid unnecessary cash reserves sitting in your savings account.
Why is this relevant?
The truth is: Every month costs the sameeven if it doesn't seem like it at first glance. Rent, public transport season ticket, food - sure, you know the fixed monthly costs. But what about the big chunks that are only due once a year? Or every 3 or 6 months?
In Switzerland, for example, the tax bill between March and October, depending on the canton. Households pay on average 10-18% of their income for taxes and social security contributions. Also health insurance premiums, Serafe, SBB-GA or the car insurance are often incurred annually. If you don't plan ahead for these costs, you can quickly end up in the red or have to rush to sell assets, which is not ideal.
How can you visualize this?
You don't have to be an Excel pro. There are now several tools that can help you with this:
- Here on GetQuin relatively automatically, also as Sankey, because @christian and its team do a great job (only as long as you can and want to offer your provider completely 😉)
- Budget apps like YNAB, Spendee and many more.
- Another popular one in Switzerland is the umbrella organization Budgetberatung (Online Budgetrechner für deine Finanzplanung)
- This too Budgetformular des Bundes is an easy starting point
- Finally, the relatively popular variant of the Sankey presentation from Finanz-Flussdiagramm: Sankey Diagramm erstellen
It is important that you not only track your monthly fixed costsbut also create a kind of cash flow calendar calendar. In other words: what major expenses are coming when? And do you have enough reserves for them? Can you reliably divide your irregular bills or bills that come in in 3-6-12 month cycles over the month?
If so, and you become a "pro", you can go even further and plan your expenses, especially one-off expenses, in the short, medium and long term.
What is short, medium and long term?
- Short-term1-3 months → Dentist appointment, new glasses, repairs
- Medium-term3-18 months → Tax bill, vacations, further training
- Long term1-5 years → Relocation, new car, parental leave, sabbatical
Incidentally, the classic rule of thumb for nest eggs is three to six months' wages on the side - not for investment, but for solvency. But...
And what if I...
...live alone and earn irregularly? Then you need more of a buffer and have to plan more conservatively.
...have a family with children? Then you should allow for seasonal expenses (vacations, school, childcare) and keep a portion variable.
...are still studying or in training? Then transparency about every expense is more important than perfection - even a simple monthly plan helps.
= In the end, you have to find out what works for you and how risk-averse you are. What is certain, however, is that too much liquidity has a negative rather than a positive impact on your asset performance. But you have to be able to cope with this mentally.
Where do things get stuck in practice?
To be honest, most people underestimate the irregularity of their expenditure. People think they live "monthly", but they actually live in payment cycles. The tax bill doesn't come out of nowhere - but it still hits you like a brick if you don't have it on your radar.
What's more, many people either plan too short-term or they park too much money in the wrong account - and wonder why their savings account barely grows or why they suddenly fall into a liquidity hole. Why don't you set up a few savings accounts for specific purposes if it helps?
How do I develop my own liquidity plan?
Start with a review of the last 12 months:
- What did you earn - and when / 12
- What major expenses did you have / 12
- What came as a surprise - even though it could have been planned? / 12
- What are your monthly expenses?
- What predictable annual costs do you incur? /12
- Do I need provisions? E.g. 10% of the furniture p.a. to be able to replace the furniture every 10 years on average.
- Do I need a buffer (e.g. for inflation of costs)? I have estimated a cost increase of 5-10% p.a. for most fixed costs and am therefore on the safe side.
- Add up p.m. Income and compare expenses p.m.
What remains (hopefully): The monthly savings installment. You can now use this freely to invest, increase your liquidity, etc. Depending on your needs.
- Professionals are then at step 10: Which costs can/do I want to contain? Do I need $NFLX (-0,48%) Super Premium? Do I pay $SPOT (-0,23%) for half the village? Do I want to spend 20% of my income on my motorcycle?
- And then finally the long-term step: How can I increase my income sustainably?
Liquidity planning sounds like something for entrepreneurs or CFOs at first. But to be honest, every household has a cash flow. If you don't know it, you live from surprise to surprise. And they are rarely positive.
So I've invested another hour (besides football) - I hope for your benefit! Let me know if it was of any use to you. ♥️
Happy investing
GG
