Cash flow is the all-powerful financial tool. With it, you build wealth. Without it, you tread water.
Maybe you consider yourself better than average with money. You take pride in elaborate spreadsheets you created while pretending to do work at your 9-5. At times, you’ve skipped meals for the sole purpose of saving money. You don’t even need a budget because you’re a tightwad by nature.
Despite all of this, most of us have experienced the following:
On the last day of the month, there’s no money left over to save.
When you realize this, your heart sinks knowing that you’ve failed your financially-savvy self.
Let’s face it, some months are thin even for the best of us. Maybe an extra tax bill comes due, or a large home repair or just plain old budgeting laziness. These months come around every once in a while no matter your financial competency.
I was hit with a negative month recently, and it sucked. If I don’t make some quick changes, it will happen again.
What Is Cash Flow?
Cash flow is a business and accounting term. Companies all have a cash flow statement. It’s corporate finance 101 material, but accountants still make them a little difficult for beginners.
Here’s Apple’s annual cash flow statement on Yahoo Finance as an example.
Since we should all be operating our personal finances like a business, it’s good to think of our situations in terms of cash flow.
Here’s my favorite definition of cash flow from Business Dictionary:
…cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance).
This quote resonates with me because each month I start with $2,500 in my checking account. During the month, I receive paychecks, write checks, pay bills, and invest using this checking account. On the last day, I take the final balance and transfer any amount over $2,500 into savings. Bad months, I transfer money from savings into checking. I always restart the month at $2,500.
So for example, if I end the month with $4,000 in my checking account after all the many various transactions, I transfer $1,500 to savings. That’s positive cash flow. I use that money to build wealth.
If instead the ending balance is $2,000, I transfer $500 into checking from savings. Negative cash flow. Now I’m treading water. Thankfully, these months are rare.
In The Shitter
Negative cash flow totally sucks, right? Yeah, mostly. But in my own cash flow calculations, I include “pay me first” investments as outflow. This includes automatic investing into Lending Club notes, my no-fee portfolio, college 529 savings, and any DRIPs that I formerly participated in. That’s about a $1,500 reduction in cash flow. But it’s being invested, so this is a good thing.
And that doesn’t include 401k contributions. That money never flows into my checking out, so I don’t count it.
I’m always saving throughout the month. At the end of the month, I’m usually still in positive cash flow territory. Those chunks of cash go to savings and often end up in my TD Ameritrade account.
Like most people, I have recurring expenditures such as utilities, mortgages, non-cable related television, and non-interest credit card bills. When a home repair, tax, or vacation bill hits in certain months, cash flow can go in the shitter.
Recurring payments kill cash flow, so I keep them tidy. Big expenditures cause overflow.
Nonetheless, my cash flow has recently suffered for a few reasons.
For one, we bought a new car with a payment (I’m not anti-new-car). The rate is 0.9%, so I consider it an OK decision because we wanted a minivan that would last us 10 years. We paid for half of it in cash. It’s a base model.
Then our property taxes went up.
On top of that, we had a third child. The day we received her Social Security card, I opened her a 529 plan. That’s an extra $300 added to the $600 we already save pretax (state only) for our other two kids. $900 cash flow gone. Though it’s an investment, I still treat it as a monthly expense.
The next big recurring expense we’re preparing for is a 2.5x increase in pre-school costs this coming September. That’s going to hurt.
So am I just screwed forever because my cash flow is taking a hit? No. But it’s time to look at cash flows to see where I can make some adjustments.
It’s time to change shit up.
Low Hanging Fruit
It sucks to see your monthly cash flow as zero or negative. There’s no one magic bullet for changing shit up. Everyone’s situation is unique.
But basically, you need to increase income, and/or decrease outflow. Start with the low hanging fruit.
I’m not writing a PhD thesis here. This stuff is easy.
Actually Do a Budget
Don’t Spend Money
Skip meals, drink cheaper beer, don’t buy that thing you “need”.
Work harder to make more money… extra hours, second job, whatever it takes. Better yet, begin creating job-free income through side hustling, freelancing, or creative entrepreneurship.
Raise the Rent
If you’re a landlord, zap your tenants with a rent increase. Takes just one awkward email exchange.
More Powerful Financial Maneuvers
Now that the easy ideas are out of the way, let’s talk about bigger, more powerful actions to take to unleash cash flow.
You can start by reading my recent post 6 Powerful (and Low-Risk) Financial Maneuvers That Put Extremely Frugality To Shame for some ideas.
OK, now that you’re back, here’s some other reliable methods for changing up your cash flow.
Rejigger Your Form W-4
One catalyst for writing this post was getting a large tax refund. Our family received $6,000 in tax refunds between State and Federal returns. That’s not good. I failed to follow my own advice by ignoring the hated W-4 form.
You receive the IRS form W-4 on your first day of work. Most people kind of follow the instructions, but don’t know what the hell they’re doing, and neither does the HR person that handed it to you. So you do your best.
If you actually work through the sheet, especially if you have a family, the claim numbers add up. We were at “5” when we got that $6,000 refund.
After filing my taxes this year, Tax Act stepped me through changing my W-4 form. It estimated I claim “9”. I ran through some calculations and settled on “8”. Sending an email to my HR rep required little effort to get it changed.
That one small change has increased my cash flow by about $200 per month.
Chunk Off Debt
This move can take some balls, but it’s rather simple in practice. If a particular debt payment is choking your cash flow, and you have the money, take a chunk of cash and pay it off.
For example, Let’s say you have a $10,000 balance on a car loan and your monthly payment is $300.
Come up with $10,000 and pay off the loan. That’s will increase your cash flow by $300. Of course, interest rates, opportunity costs, and psychology is involved too, but the math is simple.
Bad cash flow is depression for the soul. Chunking off debt might be the right move.
Decrease Your 401k
You read that right. Decrease your 401k contributions to stoke better cash flow. Hear me out.
If your monthly cash flow is tight and you’re not happy about it, AND, you’re maxing out your 401k, cutting back on your contributions is an easy fix. Yeah, I know, you’re missing out on that tax-advantaged savings. But cash flow is king. Happiness is important too.
I actually recently came across a situation where I needed to reduce my 401k contributions in order to increase the total benefit.
Last year I ended up with less money by front-loading the maximum amount of contributions. My company, despite having a rather crappy 401k plan overall, does have a decent match. They match up to 4%, and the contributions vest at 100% immediately.
By contributing at 15% from January on, I hit the maximum amount I could contribute by law near the end of the year. Since I could not contribute to the plan anymore, I did not receive the 4% match for a few paychecks.
While not a big loss, it’s still money I could have put in my pocket.
In reaction to learning this, I lowered my 401k percentage to even out contributions throughout the year. This way I’ll get the match for every paycheck, but still contribute the annual maximum by December 31st.
A side effect is my monthly paychecks are larger.
In a recent post I wrote about DRIPs (dividend reinvestment plans). The longer I’ve invested in them, the less inclined I am to continue. This April, I discontinued contributions to both lingering plans.
The reasons for discontinuing them vary. But it was, in part, cash flow driven. I asked myself, is adding $100 a month to both the Procter & Gamble DRIP, and the Aqua America DRIP, the absolute best use of $200 every month?
I decided I’d rather cash flow that $200 instead of DRIP it.
Another reason was that both DRIPs reached the $3,000 mark. When I initially set up these DRIPs, that was the level I wanted to reach to generate respectable dividend income. Going forward, I’ll likely take PG and transfer to TD Ameritrade to pool the dividends.
Aqua America gives DRIP participants a 5% discount to reinvest dividends. For example, if I reinvest my dividends when the stock is trading at $30, my price to buy shares is $28.5. That’s a rare discount I’m taking full advantage of. As long as that perk continues, I’ll keep the DRIP going.
But the move to end these DRIP contributions increases my cash flow by $200.
Doesn’t sound like much, but add that to the W-4 adjustment and the 401k change, my cash flow has increased by $600-700 every month.
Consolidate, Refinance, and Get Creative with Outstanding Debts
Refinancing debt should always be considered to boost cash flow. It’s one of six powerful (and low risk) financial maneuvers that all debtors need to periodically review.
Mortgage refinancing is one of the most powerful of all cash flow improvement plans. But don’t stop there.
Get creative. Consolidate. Make chunk payments on high rate loans. Check out services like Lending Club for better rates than your credit card payments.
Quite possibly, the healthiest of all cash flow boosting activities is to get serious and pay off debts altogether.
Having a website on the internet doesn’t make me perfect with money. Far from it. I’ve gotten a little lazy at times and seen expenses creep up. Doesn’t mean I can’t change shit up to fix things.
There’s many sure-fire methods for increasing cash flow. Increase income however you can. Cut spending, preferably recurring expenses first.
The challenge is to recognize you have a cash flow problem first. Then you must commit to changing it.
How’s your cash flow these days? What have you done recently to change shit up?
Shitter photo by Charles Knowles via Flickr