Simple Secrets: Understanding CashFlow

11 02 2009


Photo courtesy of ‘morena7

Cashflow is simply the way money moves (or flows) into and out of your household.

Just as it’s not safe to play in a swelling river if you don’t know what you’re doing, if you don’t understand the cashflow dynamics of your financial situation, you will get swept away by the current of your currency. (Admit it, you liked that phrase lol.)

This simple principle is not to be underestimated. For instance, if you and I have the exact same budget and the exact same income to work off of, but only one of us has a grasp on the power of cashflow, our situations will go in very different directions.

One thing that is crucial to learning how to master cashflow, is gaining the understanding that cashflow planning and budgeting are not the same things, although they do work in concert.

Budgeting is telling the money where to go.

Cashflow planning is telling the money when to go.

That’s it!

Effective cashflow planning can mean the difference between consistently coming up short each month for a bill, or having enough for that same bill and maybe one or 2 others.

So in a few quick steps I want to give you a template for finding the sweet spots in your cashflow.

First, analyze the due dates for your expenses, especially the problematic ones. Also make sure those due dates are listed on your budget when applicable. Is there a bill being paid at the start of the month, that isn’t due until the end? Consider moving or splitting that expense across more than one check. I’ll explain splitting more in the following points.

Second, for constant expenses such as gas, food, groceries or blow money, I’d recommend splitting them into equal amounts across the paychecks you receive for that month. For example, if your house brings in 4 checks each month and you have a budget of $200/mo for groceries, split them into $50/check increments.

Third, for items that are constant monthly expenses, but are just too large to pay in one paycheck (like a mortgage or rent) split the total amount into amounts that are more manageable on a check-by-check basis. Allocate more towards the payment amount on larger checks and less on smaller checks .(Say, if the amount per check is not the same, or if you work more than one job.) As the month goes along you will envelope the funds as you build them up to the full payment amount. *Unlike step 2 the goal of this suggestion is not to split evenly across your checks. **This type of method almost always works better if you are already using a Zero-based budget.

Fourth, watch out for expenses that may not happen on a monthly basis like car insurance, smarttag fees, or even oil changes. For these you either want to create a line in your budget that is enveloped towards. Whether you do this on a monthly or per check basis will be up to you. *This can also be done for one-time annual fees such as membership dues – just take the total amount, divide it by 12 and let that be your “monthly” payment amount for that expense.

Fifth, watch out for ‘Leaks’. A leak is any seemingly small expense or habit that drains your income over time. A leak can come in the form of anything that you purchase but do not document or budget for. Do you frequently get chips out of the vending machine at work? Or pick up a lotto ticket while pumping gas? Or maybe you decide to get that tabloid on a whim while standing in the checkout line. When you add up how much you’ve spent on that expense at the end of the month, you’ll quickly identify your leaks… and trust me, you’ll be shocked.

Like I’ve said a few times in this post, understanding your cashflow just cant be stressed enough. I hope some of these pointers will help you financially “stem the tide”!

Until next time,

@W

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