Do you often find yourself in a fiscal squeeze at the end of the month? If so, there are 3 cash flow solutions that can solve this – “mucho pronto”. Let’s dive in.
1. Get Your Terms Right
American inventor Charles Kettering said that a problem well stated is a problem half solved. So let’s take a moment to really understand “cash flow” because it’s far different from “overspending”.
When you buy something you can’t afford, you’ve overspent. This is true whether or not you happen to have the cash or not. The solution for this is to abstain from buying the “thing”.
Now if you buy something you can afford you can still have cash flow problems. This happens when you just don’t happen to have the cash at the moment. The solution for this is to manage your cash flow better.
These are two very different solutions to two very different problems. As you can see, the trick is to determine whether or not you can afford the “thing” or not and then manage your cash flow.
2. How to Know if You Can Afford it or Not.
There is only way to know if you can afford something or not and that’s to maintain a budget. Before you curl up in a fetal position or throw your hands up in surrender, keep in mind that maintaining a budget doesn’t have to be difficult.
One simple way to budget is to use my quick three step method. First run a mini-financial plan. This will tell you what you spend on average each month and how much you need to save each month in order to reach your long term financial goals as well.
Next, you’re going to open up 3 accounts. In the first account, deposit the amount you spend on average each month. That will be the account you use to pay your expenses as they come in each month. Once you deposit the money, consider it spent. If at the end of the month you have anything left over, leave it alone. Remember that you are working with average spending. You’ll spend more in some months and less in others.
The second account you open will be an investment account. Don’t worry. You can open this account with as little as $25. You’re going to use this investment account to automate your savings. When you ran your mini-plan, you figured out what you need to save each month, remember? Set up an automatic deposit into this investment account for that amount.
The third account is your fun money. If you have any amount left after you’ve taken care of the first two items, this is money you can afford to spend on anything you like.
A more involved solution is to use a software package like YNAB (You Need a Budget). This essentially sets aside money for your short-term and long-term needs but it also allows you to budget for the object of your desire. When you accumulate the needed cash, that’s when you can afford it. I love YNAB and so far I’ve heard nothing but accolades from other Pilgrims who are using it too.
Whichever method works for you, just make sure you stick to it. But keep in mind that the only way to know if you can afford something or not is indeed to use some type of tracking system.
3. Cash Flow Management
If you follow one of the budgeting systems I described above you’ll know when you can afford things ….most of the time. At the very least, you won’t spend money you don’t have and that’s a great start. But there are times when you actually can afford something, justifiably need to spend the money yet don’t have the cash at the moment.
Let me provide an example. Let’s say your quarterly car insurance payment is $210. You’re a smart cookie so you set aside $70 a month for that expense. But if you’re first payment comes due in 2 months, you’ll only have $140 available to pay for a $210 expense. I’m no Einstein but according to my best calculations, that math won’t work. How can you avoid this from happening?
Your best approach is to have a sufficient emergency buffer. Some people need 3 months average expenses and some need more. It depends on your personal situation. But if you have a big enough emergency fund set aside and don’t use it for fun money, you will have the money you need when you need it. This emergency money could be sitting inside your first account. That’s how I do it anyway.
In summary, your budget and emergency stash are your spending and cash flow solutions. If this is new to you, rest assured that you can put all this into place very easily. Slow down and take one step at a time. Send me an email if you have questions. Let me know about your success as well.
What other cash flow solutions have worked for you?