Cash Flow Management

Managing your cash flow is the first and most basic step of personal financial planning. It is vital to being able to accumulate wealth, invest for the future, and get out of debt. How much money you have coming in each month is not nearly as important as making sure that you spend less than you bring in. That's cash flow management in a nutshell.

Sure, it sounds easy, but we all know it's a lot harder than it sounds. If it was easy then we'd all be millionaires, right? So what makes managing our cash flow so difficult? There are a lot of factors actually, but they can all be managed with a little dedication and persistence. Here are the main reasons why most clients struggle with this step:

1. Higher costs of living. We all know that it's just gotten more and more expensive to live over the years, and it takes a lot more cash flow to pay the bills. This is a normal fact of life called inflation. Fortunately most people's pay goes up with rising inflation. But in recent months there have been hundreds of thousands of people losing their jobs each month which is only making things worse for many. When it comes down to it, it just takes a lot of money to live these days.

2. Spending habits. Even though it is expensive to live just about anywhere, most people's spending habits today get them in a lot of trouble. We live in a world where when you want something, you feel like you should just be able to go buy it regardless of your cash flow situation. Many people spend money as a way of dealing with stress or unhappiness. Buying something new makes them feel better. Shopping and finding good deals gives you a sense of superiority and success. One couple I knew used buying things as a way of getting back or getting even with each other. They would get into a fight and then one of them would go out and buy something for themselves. Then the other spouse would say, "Well since you spent $100 on that for yourself, I'm going to spend $100 on something for myself." It went back and forth for several years until they had amassed $30,000 in credit card debt and had to declare bankruptcy. This bring us to the next big issue.

3. Credit card debt. As of the end of 2008, the average American household was carrying $8,329 in credit card debt, and owned an average of 5.4 credit cards. Since American Express first offered a credit card in 1958, ownership has grown to over 78% of American households who now have one or more credit cards (that's over 91 million households). Credit cards are clearly here, and here to stay. They are also a great tool, if one learns to use them wisely.

Easy access credit has made it too simple to buy things when you don't have the money to pay for it. Credit card use is so easy that you forget how much you've spent...until your statement comes. Then when you open it you are shocked by the balance and you can't believe you spent as much as you did last month. When you manage your cash flow properly and keep track of your spending throughout the month, you won't be so unpleasantly surprised to open those statements.

4. Buy now - pay later promotions. You see these things wherever you go these days. 'Zero interest, zero payments' deals entice people into buying these they want and need today without having to worry about paying for it until months down the road. You think to yourself, "that's plenty of time for me to save up the money. Surely I'll have it by then." That's how they get you! The 6 or 12 months goes by quickly, and most people don't actually save the money or set it aside. What they don't mention to you is (it's in the fine print) if you haven't paid the entire balance off by the time your 'zero interest' period is up, you have to in fact pay interest that's been accruing during that time. It's usually a pretty high rate too. It's a pretty enticing and sneaky offer that really pays off for the companies who make them. They know that most people won't pay it off during the promotional period, so they will end up getting lots of interest from you in the end. But if you manage your cash flow and set aside some money each month, you'll have it ready to pay off the balance right before the zero interest period is up.

5. Tracking your spending. This is a very simple thing, but difficult to actually do consistently. Keeping track of what you've spent your money on is the quickest and easiest ways to make sure that your cash flow is in the positive at the end of the month. Tracking how much you've spent will help you control how much you spend. But you have to keep track throughout the month.

There are a number of ways that you can do this. If you want to use some bookkeeping software like Quickbooks or Microsoft Money, that will work. Those programs can integrate with many online banking features so that it automatically downloads and records your expenses. Or you can use a simple spreadsheet to record expenses as you spend the money. Or you can use an all cash system where you spend only cash, and when it's gone it's gone. It doesn't really matter how you do it, you just need to do it.

My favorite way is to use a spreadsheet and set up categories or buckets for each category of spending. You set a monthly dollar amount that you can spend for groceries, gasoline, clothing, gifts, telephone, utilities, miscellaneous, etc. As you spend money each week to buy things in these categories, you record the amounts and subtract it from your monthly allotted amount. When you've spent all the money in that category for the month, you just have to stop. You want to make sure you set up categories for once/year things like Christmas, taxes on your cars, life insurance, or whatever. That way you don't have big surprises when those bills come, the money will be in your bank account waiting.

Now that we've covered ways to control your cash outflows, lets talk about something a lot more fun, ways to INCREASE YOUR CASH FLOW.

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