Jiri, 38, has €5,000 of net pay landing every month. His regular costs are €4,000, so he thinks of himself as saving €1,000 a month. He has €18,300 in easy-access savings and €45,000 in investments and a pension. On paper he is doing fine. A few times a year, he quietly juggles a credit card for a few weeks.
A monthly average hides the months that come up short
The Cash Flow 101 post treated cash flow as a monthly average, which is the right starting point. A cash flow forecast goes one layer down: what actually lands in each month. Jiri’s regular €4,000 is joined by five lumpy expenses:
| Month | Regular costs | Once-a-year cost | Total |
|---|---|---|---|
| January | €4,000 | €1,800 car insurance | €5,800 |
| March | €4,000 | €1,300 tax top-up | €5,300 |
| June | €4,000 | €1,200 summer holiday | €5,200 |
| September | €4,000 | €1,100 back-to-school costs | €5,100 |
| December | €4,000 | €1,500 holiday spending | €5,500 |
| Other months | €4,000 | €4,000 |
The lumpy items add €6,900 to the year, so his real costs average €4,575 a month, not €4,000, and he really saves about €425 a month, not €1,000. In five months of twelve, costs are higher than his pay. In January alone the account needs €800 more than the month brings in; if the current account is thinner than that going in, January is a shortfall month. That is not a budgeting failure. It is a calendar failure.
A common fix is the twelfth rule: add up the once-a-year costs, divide by 12, and set that amount aside every month, so the money is waiting when the bill lands. For Jiri, €6,900 ÷ 12 is €575 a month. Other fixes are moving a cost (paying insurance quarterly), keeping a bigger buffer in the current account, or timing a bonus or tax refund to land in the short month.
Quick check: Jiri's pay covers his average month. Why can January still come up short?
Because the average spreads the €1,800 insurance across the year, but the bill lands in January alone. That month costs €5,800 against €5,000 of pay.
A forecast and a projection answer different questions
The financial projections post asks how big your wealth will be in 20 years; it runs yearly, on long-run averages. A forecast asks whether, in February, the current account will cover the insurance after the mortgage has gone out; it runs monthly, and cares about timing. The two work as a pair: a good projection with no forecast can still hit a bad month that forces a sale of investments at the wrong time, and a good forecast with no projection says nothing about retirement.
A forecast also shows the large one-offs coming: a car in three years, a deposit in five, a wedding in eighteen months. Each is a scheduled draw on liquid money, and each is easier to plan for years ahead than in the month it lands.
Cash runway: how long your money lasts if your pay stops
Cash runway is how many months your liquid assets would cover your real costs if income stopped today. It is the emergency fund made concrete against what you actually spend.
Jiri’s budget suggests €18,300 ÷ €4,000, about 4.6 months. His real costs include the lumpy items, so it is €18,300 ÷ €4,575: four months. For this measure, Jiri counts only his easy-access savings. His investments add to net worth and could be sold, but relying on them could force a sale after a fall, and pension access may be restricted, taxed or penalised.
Runway moves with costs: a baby, a more expensive city or a bigger mortgage means the same cash covers fewer months.
Quick check: Jiri moves and his real costs rise to €5,000 a month. What happens to his runway?
It falls from four months to about 3.7 (€18,300 ÷ €5,000), with the same savings.
Which money counts as liquid
For a forecast, money falls into three tiers by how soon it can be spent:
- Spending money, for this month: the current account your pay lands in, enough for the month plus a small buffer.
- A safety buffer, one to six months of costs: easy-access savings or a money-market fund you can move within a couple of days without penalty. Single-income households in unsteady fields often hold more; two steady incomes often less.
- Goal money, six months and beyond: cash earmarked for a known cost inside the forecast window, such as a deposit or tuition.
Pensions, invested capital and property sit outside all three. The liquidity post set out the full spectrum, and the cash management post later in this series covers which accounts suit each tier.
How to build a 12 month forecast in a spreadsheet
No special software is needed. A sheet with twelve columns, one per month, and rows for net income, regular costs, variable costs and lumpy items is enough. Fill in what you know about the next twelve months, put each once-a-year cost in the month it lands, and work out each month’s closing balance: last month’s closing balance plus this month’s income minus its costs. Any month that closes below your spending buffer is a shortfall month that needs a plan. Twelve to twenty-four months is the useful window; beyond that, month-level guesses stop meaning much and the projection takes over. Many people look at it again every quarter, or after any big change.
Three ways a forecast fails silently
Leaving out the once-a-year items. A forecast built from typical months misses the insurance renewal, the tax bill and the annual subscription. If you cannot list your ten biggest once-a-year costs from memory, the forecast is probably missing some.
Using gross pay. A €5,000 gross salary might land as €3,800. A forecast built on €5,000 is over-optimistic by €14,400 a year. The number that matters is what reaches the account after tax, pension contributions and other deductions.
Underestimating variable costs. Rent is rent; groceries, utilities, eating out and transport move around. A defensible middle estimate, checked against reality each month, works; always using the low estimate turns the forecast into a wish.
The five once a year costs, by country
- Insurance renewals: car, home, life, disability, private health; the renewal month is often arbitrary.
- Tax payments. Salaried workers in most countries have tax taken at source, so the yearly lump is small or none. Self-employed people and higher earners often owe a top-up. Self-employed people may make advance or estimated payments during the year, on schedules that differ by country (India and the US use instalments, for example). Employees under systems such as UK PAYE and many EU payrolls usually have tax taken from each payslip, though a later return or assessment can still bring a refund or a top-up.
- Property costs: property tax (council tax in the UK, taxe foncière in France, Grundsteuer in Germany, municipal property tax in India), billed yearly, twice yearly or in instalments, and maintenance.
- School or tuition: termly in many countries, once or twice a year in others, yearly at university.
- Seasonal and cultural spending: holidays, gift seasons and festivals such as Diwali, Christmas, Eid or Chinese New Year.
The idea travels; the list is your own.
Why wealthy households still run short
Net worth and cash flow can move in opposite directions.
Asset-rich, cash-poor. Maximising pension contributions and investing every spare euro leaves too little liquid money. The projection looks great; any disruption forces an early withdrawal, often taxed or penalised, or expensive borrowing.
House-poor. A large mortgage eats so much monthly cash flow that the current account is always thin, even while home equity lifts net worth. Refinancing, covered later in this series, is sometimes a fix; sometimes it is a smaller home.
Last year’s forecast for this year’s life. A new baby, one parent staying home, a move, an ageing parent who needs support: each shifts the forecast a lot, and forecasts do not update themselves.
A forecast is only as good as the last look
Software and apps that pull from your accounts save effort but do not change what a forecast is: the once-a-year costs, net pay rather than gross, honest variable costs, and a regular look. The rest of this series builds on it, from testing decisions to planning life events and placing a windfall in the month it lands.
Which once-a-year cost is most likely to catch you in a thin month this year?