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Cash Flow and your personal finances

February 27th, 2007 at 04:58 am

The expression "cash flow" is typically used in relation to businesses.

However, cash flow is as important to you as an individual, and possibly even more so than a business.

Cash flow is about how money moves in and out of your bankbook over the course of a set period. For home, it's either monthly, or between pay periods.

If you are struggling to keep money in your checkbook and tend to rely on credit cards, it's likely that while you might be a spender, you might also have a cash flow problem.

Think about the beginning of the month. For most of us, our big debts tend to be at the first of the month. For most, mortgage or rent is due at the first, and depending on your net income to mortgage payment ratio, you might have very little to none left to cover other bills for the first two weeks of the month.

And at your next pay check, you spend your cash to cover the bills that were due at the beginning of the month. In the mean time, you might have used your credit cards to get you though, but you might not be making as much headway on them as you think.

Being in the wrong cash flow cycle is a viscious circle and it's a trick to get cash flowing positively in your household, but trust me, from experience, I know it can be done.

First, assess all the bills you have, including utilities and childcare or any recurring expense, even prescriptions.

Now, what can be moved to the middle of the month? Most creditors, including your mortgage company, will allow you to change the due date on your account.

Figuring out the in-between paycheck variable costs is the next step. How much does it cost you to eat, be entertained, and otherwise flex "expendable" income during the two weeks between pay periods?

Look at the net income to the sum of all your bills combined - are you positive, negative, or break-even?

For many, until they learn to control their personal cash flow, they tend to slip further and further behind.

So, the strategy to making cash flow positive in your house.

1. Rethink how you pay your bills. If you can't move your mortgage payment, move other bills and utilities till the mid-month. Having a bit of cash left after the mortage and other beginning of the month bills is essential so you don't tap into credit cards to get through to the next pay period.

2. Pay the bills quickly and on time. Don't let bills sit to long - even if you have the time before they are due, some loans and debts are better being paid in an ahead-cycle. Paying ahead, and even rounding up to the nearest 10 dollar increment will help improve cash flow in the long run because the debts get paid off faster and accrue less interest.

3. Separate the needs from the wants. If you struggle with cash, getting paid at the mid-month and having some money left over isn't a license to splurge and be completely run out of money before your next pay period. Break down the needs from the wants, and only buy the needs, and when you do get into positive cash flow, splurge a little on the wants, because complete financial restraint will make you and the people around you miserable.

4. Find ways to get the needs cheaper. Shop with coupons and try to buy everything on sale.

5. Attempt to consolidate debt. Amazingly, you get a lot further faster paying one or two debts vs. minimum payments on lots of litte debts. Look for the low interest CC offer, or if you can safely do so, tap the home equity, but only if you know you won't be tempted to run up cards again.

6. Build a bridge account. This is money that isn't an emergency fund, and it isn't an investment. It's a bridge fund that can cover you between pay periods in the event life happens on your way to trying create positive cash flow. Bridge accounts are for things like snow chains that you didn't know you needed because it's March and should be done snowing. It could be for an unplanned for gift or event. The bridge account shouldn't be something you tap into every time between pay periods. Over time, it can really add up.

Besides paying into the bridge account, let money find it's way there. Deposit rebates into this account. Move double entries from your checkbook here too. For example, if I paid a bill for $50 and entered it twice by mistake in my checkbook, instead of having a $50 windfall to spend, pretend it wasn't a mistake and let it ride. In five years, my bridge account has become over $5K.

7. The last step to getting into positive personal cash flow is to be in touch with your money - DAILY!!! You might not think daily is necessary, but get a software program to do your checkbook with, and upload from the bank daily, and enter receipts daily. I can't stress the word DAILY enough. This helps you understand how cash moves through your account, where you can prevent bleeding, and when you are in touch with your money, it tends to curb spending. And also,you don't miss entries. Most people bounce checks not because they are bad people, they are just bad bookkeepers. A missed entry for a grocery trip, fill-up at the gas station, or a latte might be what causes you to bounce your account, putting your even further into negative cash flow for having to pay the associated bank fees.

The benefits of positive personal cash flow....

- you don't have to tap credit cards to get through the in-between weeks.
- you actually have extra cash to put towards bills.
- you can save cash for major purchases.
- you can take the money you're saving, and learn to utilize pre-tax accounts.
- save on bank charges, credit card interest and late fees for having the cash to pay the bills ahead of time.

And lastly, there is just a sense of peace when you are in control of your finances.

Entry by Hotcouponmama

3 Responses to “Cash Flow and your personal finances”

  1. Nic Says:

    Build a bridge account<~~SmileLove that idea. I have a checking/savings acct. If I have to,I transfer $$ from savings to checking. I also "pay" myself back
    from the next paycheck

  2. Hotcouponworld Says:

    Someone asked me where I heard the expression "bridge account". I didn't hear it - it's something my hubby and I coined when we started doing it. The money we collect that way isn't in our savings account, it's hidden in Quicken. So if we dip into it, we "go into the red" (where quicken makes your entries Red colored if they draw you into the negative) and we know we could go into the red by $5K if we ever had to. It's an interest bearing checking account, so it does make a few pennies, but while we could put the money elsewhere, where it is protects us from overdrafts and missed entries in our checkbook.

    Since we have had this account, truthfully, we stopped balancing our checkbook. I could figure it out if I needed to by taking the quicken balance + the uncleared entries - our online bank balance to come up with how much money is really in the account, but we haven't had to do that in a few years since the amount has grown. We average about $1K a year in new money in that account. The bridge concept then refers to the time period between paychecks, and if you have cash to get you over the bridge, you won't be apt to use credit cards to get you through the little things.

    While I agree with the concept of a fund that is equal to a few months of your pay, you don't want to be accessing that money for the small things - a missed bill, a gift, a tire replacement, etc. Those aren't emergencies, they are everyday life. And too often, we get caught putting everyday life on our credit cards (myself included) and it can be overwhelming when you look how fast everyday life can bury your finances. A bridge account is helpful in that when you know you've dipped into it (it's sitting right there in big red numbers) that when you put your next paycheck in, you are right back in the black, vs a credit card where you might only hit the minimum payment which barely covers interest.

    Hotcouponmama

  3. Aleta Says:

    I like your idea and we have a similiar account called UNALLOCATED FUNDS which saves us as well. We also have a accounts that we consider escrowed until ready to pay.

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