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Understanding and Improving Cash Flow

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One of the more powerful concepts to understand in the matter of personal finance is cash flow. Most of us can easily tell the difference between being confident & comfortable with our finances versus struggling with our finances.  Unfortunately, many people do not truly understand cash flow, nor do they grasp the crucial role it plays in regard to their own personal finances. When you understand the concept of cash flow and can then work to improve it… you give yourself tremendous flexibility which will undoubtedly bring to light many otherwise indiscernible opportunities.

What is cash flow?

Cash flow is basically your income minus your expenses. If your income is about the same as your expenses, you’re living paycheck-to-paycheck. If your income is higher, you’re financially okay. And if your income is lower, you’re accumulating debt. Very simple isn’t it?

And here is the beautiful part. Once you understand the basic components — income and expenses — you can begin to take concrete actions to improve your finances. And you can break down the problem even further by looking at reducing individual expenses and improving your income.

How to improve your cash flow

Reduce your expenses

The quickest way to improve your cash flow is by attacking your expenses; especially the recurring month-to-month type. The biggest bang for your buck is your mortgage, if you have one. Take a look at today’s best mortgage rates and see if it makes sense for you to refinance. Refinancing alone could free up several hundred dollars that you could use for other financial endeavors.

This process of expense reduction is even easier if you are already keeping a budget. If you don’t have one, you should start tracking your expenses and start work to create one. The key to success in expense reduction is doing all the little things that add up and trying to take one small step at a time. Don’t try to reduce your expenses by 50% — it will never happen. Challenge yourself to cut $50 a month or a $100 a month. Once you accomplish that, go for another $50, and so forth.

Increase your income

The other side of the equation is improving your income. This is harder than cutting your expenses, but there are things that you could do — even little things like moving your money to a high interest savings account helps you to earn more. Again, it’s all the little things that add up.

What about a other income ideas? You can basically break them down into a few categories:

  1. Earn more from your job — i.e., ask for a raise, get a promotion, work overtime, etc.
  2. Earn more outside your job. Here are a few additional income ideas for you to mull over.
  3. Make your money work harder — i.e., investing in the stock market, real estate investing, and other alternative investments, etc.

What to do with your free cash

So you’ve improved your cash flow, what should you do with the extra cash? Here are a few ideas:

  • Pay down your debt — e.g., credit card debt reduction, car loan, student loan, etc. As you do this, you’ll free up even more cash because you no longer have to pay all the finance charges and monthly payments.
  • Invest your money. Again, make your money work for you and continue to improve your cash flow.
  • Give. If you are in a position to give, charitable donation is also a great way to use your money.

I hope you enjoyed this article, and more importantly, I hope you walk away with a few ideas you can use to improve your finances.

Pinyo is the owner and primary author of Moolanomy Personal Finance blog. Moolanomy focuses on practical money management concepts, personal finance tips, and wealth building. If you like this article, please visit his blog. Lastly, you can leave financial question on Moolanomy Answers where Pinyo and other community members participate to provide you with answers.

The Whole Armor of Personal Finance

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Some of my favorite bible verses are those packed full of encouragement and power.  In the following passage, the Apostle Paul is speaking to the church at Ephesus regarding the battles to be fought, and the weapons with which they should fight.  This text is incredibly uplifting and full of timeless wisdom.

Paul reminds the reader that the Christian battle is not one of flesh and blood, but of principalities, powers, the rulers of this world, and wickedness in high places.

It reminds me of our battle against debt, advertising, commercialism, and the war we fight to gain control over our personal finances.

The Scripture

Finally, my brethren, be strong in the Lord, and in the power of his might.  Put on the whole armour of God, that ye may be able to stand against the wiles of the devil.  For we wrestle not against flesh and blood, but against principalities, against powers, against the rulers of the darkness of this world, against spiritual wickedness in high places.  Wherefore take unto you the whole armour of God, that ye may be able to withstand in the evil day, and having done all, to stand.  Stand therefore, having your loins girt about with truth, and having on the breastplate of righteousness;  And your feet shod with the preparation of the gospel of peace;  Above all, taking the shield of faith, wherewith ye shall be able to quench all the fiery darts of the wicked.  And take the helmet of salvation, and the sword of the Spirit, which is the word of God:  Praying always with all prayer and supplication in the Spirit, and watching thereunto with all perseverance and supplication for all saints;”  – Ephesians 6:10-18

The whole armor of God

  1. Loins girt about with Truth
  2. Breastplate of Righteousness
  3. Feet shod with the preparation of The Gospel of Peace
  4. Shield of Faith
  5. Helmet of Salvation
  6. Sword of the Bible

The whole armor of Personal Finance

  1. Loins girt about with Wise Money Management
  2. Breastplate of Frugality
  3. Feet shod with the preparation of Sound Financial Counsel & Education
  4. Shield of Contentment
  5. Helmet of A Proper Money Mindset
  6. Sword of Cutting Expenses

Loins girt about with Wise Money Management

  • Budget to gain control & focus on Spending less than you earn
  • Emergency fund savings – while many say to get at least $1,000 saved for emergencies, I advise to continually fund your emergency fund and other high interest savings accounts by using the percentage approach.  I currently designate 25% of my available funds to my savings even though I am still in debt reduction mode.
  • Debt reduction – where I focus the remaining 75% of my available funds.  It is of the utmost importance to rid yourself of all your high interest consumer debt like credit cards, department store cards, auto loans, etc.  Once you pay off your high interest debt, I advise shifting the majority of your available funds to savings & investments.
  • Invest & continue to save – once you have paid off your high interest consumer debt, continue building your EF and invest the rest in your investment of choice.  Index Funds (through Charles Schwab or Vanguard) are solid, low-cost, choices that will meet market returns.
  • Pay off your mortgage & student loans – once you have your savings funded according to the needs of your individual situation, paint a big bulls-eye on your low interest debt and slash that baby down as quickly as possible.  I may catch flack for saying this, but I am a HUGE proponent of paying off the mortgage and living DEBT FREE.

Breastplate of Frugality

  • Creative mindset – get your creative juices flowing & be resourceful.  Before we do anything now, my wife & I run all our financial decisions through our protective frugal filter.
  • Stop eating out – If you have been following our Debt Free Adventure then you may well know that Mrs. Jabs & me were spending between $5,000 – $6,000 a year eating out at restaurants.  Looking back now, this is absolutely atrocious to me but before equipping ourselves with the breastplate of frugality we just didn’t concern ourselves with the costs.  If you must eat out use my Frugal Guide to Eating Out.
  • Homemade gifts & products – making more things at home including:  food, cleaning products, gifts, home decor, etc. will save you money and bring many other benefits along with it.  We make products such as homemade laundry detergent, toothpaste, deodorant, all-purpose cleaner, homemade dishwasher detergent, etc.  We also stopped buying cards & gifts and choose to make our own now – the results are more personalized, unique, and special than their store-bought counterparts.
  • Use Coupons – When we do buy things we always shop around and seek out coupons.  This is especially useful when shopping on the Internet, before I make any purchase I simply go to Google and type in “Coupon *product I’m buying*”
  • Ask for discounts – I tell my wife all the time, you never know until you ask!  Just a few weeks ago, when putting in my paver patio I saved over $300 by simply asking for a discount due to the volume of my purchase.
  • Decrease use of heat & AC – we used to keep our house at 70 in the winter and 74 in the summer.  Now we keep it at 64 in the winter and have actually been able to keep our A/C off every day this summer except for two!

Feet shod with the preparation of Sound Financial Counsel & Education

  • Adopt a financial mentor – when I truly began to get a hold on my finances at the beginning of this year I found myself in need of some solid financial advice from those who were already standing where I wanted to be.  I decided to adopt a few financial mentors and they continue to be an ENORMOUS blessing in my life.
  • Read personal finance blogs – they’re free and chocked full of sound money advice.  A few great ones to get you started are Frugal Dad, Bible Money Matters, Get Rich Slowly, Five Cent Nickel, and The Simple Dollar
  • Read personal finance books– if you are like JD Roth and you like the smell of books, or you simply love the feeling of a good book in your hands then get started with a few goodies.  I recommend:
    • The Total Money Makeover – by Dave Ramsey
    • Your Money or Your Life – by Vicki Robin
    • The Richest Man in Babylon – by George Clason
    • The Treasure Principle – by Randy Alcorn
    • 10,001 Ways To Live Large on a Small Budget – by the writers of WiseBread.com

Shield of Contentment

  • Simplify your life – break free from the culture of temptation that marketers have been driving at us for decades, and choose instead to return to a simpler life.  Ride your bike more, walk more, read more, turn off the TV.  All of these things may seem like sacrifices at first but after being exercised by them Mrs. Jabs & me have realized the true blessings of a simplified life.
  • Determine your needs – what do you need at a most basic level?  Water, food, shelter, and love – everything else is a bonus.
  • Determine your wants – our wants can be endless so it is incredibly important that we realize this and quickly determine what we can do to keep them in check.  What kind of food should we buy?  How big of a house?  What clothes should we wear?  These questions, like many others in this post, will be answered differently based on your income, debt, age, and relationship status so be sure to answer them specific to your position.
  • Find a balance – now that you have separated you wants from your needs, focus on finding that balance where you have what you need, are living below your means, but still comfortable.

Helmet of A Proper Money Mindset

  • Sacrifice now to benefit later – this is actually my entire financial philosophy in a nutshell.  The concept is simple and revolves around my view that it is better to scrimp & save now than it will be when you’re in our 60’s, 70’s, 80’s, & 90’s!
  • Embrace compounding interest – to motivate yourself, calculate how much interest you are paying to big banks and do whatever necessary to reverse that cycle and start paying yourself first.
  • Spend less than you earn & avoid debt – this isn’t rocket science and does not require explanation.
  • Save/invest increasingly – Grow your savings every year, even if you are currently paying debt.  Always pay yourself at least 25% of your extra money each month.
  • Give generously – it truly is more blessed to give than to receive.  Since implementing an automated charitable giving plan earlier this year, my wife & me have never had a better grasp on our finances.

Sword of Cutting Expenses

  • Turn off your TV – I mentioned it earlier in the post and I am purposely mentioning it again.  It is hard to impress upon you the many benefits of canceling your TV service.  I am much more productive in my side hustles, I spend more time with my wife, I accomplish more around house… especially in the way of my “honey do list”.
  • Reduce grocery costs – grow a garden, make more homemade food, stop eating out, buy in bulk, eat locally, preserve the harvest by freezing it and by canning it.
  • Reduce your consumption – I’ll say it again… turn down/off your furnace and turn down/off your air conditioning.  At first we thought this was uncomfortable but found we adapted to the temperature quickly.  Now that we no longer use our A/C we are always very cold when we go into a building that has it in use.
  • Carefully check your monthly bills for errors – I was able to save $160 over the course of two months because my utility company was over charging me.  I am not sure whether this was done on purpose, but regardless, by checking the bill and looking it over carefully I was able to save a lot of money.

I hope you were encouraged by this article, and that it helps to equip you with the whole armor of personal finance so you can protect yourself from the wiles of debt, advertising and commercialism.  Let us fight the good fight of faith and strive to win the daily battle to gain control over our personal finances!

How Much Should We Spend

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I get this question a lot because couples often wonder what is acceptable to spend on different purchases.  It’s natural for people to compare themselves to others, but the problem is you do not know everything going on in their lives.  They might make way more or way less income than you think.  Spending is not a sign of wealth!  Most people think a person driving a $60,000 vehicle with a $500,000 house is wealthy, but all it really shows is that they know how to spend money, not that they necessarily have money.  So, here are a few guidelines for knowing how much to spend:

First of all, spend less than you earn

I know this sounds really obvious, but most people (in the U.S. anyway) don’t actually put it into practice.  If they did, we wouldn’t have the debt problem we have today.  That is how debt happens.  You spend more than what you make and use credit cards, home equity loans, payday loans, etc. to pay for it.  So, the best way to determine if you should spend money or not is to ask yourselves if you have the money in the first place.  Not if you can afford the payment, but if you can afford it at all.

Spend less than you make by doing a budget

Unfortunately, many people do not have a clear picture of what they make.  If I asked you how much money you make, you could probably tell me $50,000 per year.  When I ask what your monthly  take-home pay is, that’s a different story.  It often amazes me how many deductions people have taken out of their paychecks when I work with them as clients.  The work cafeteria, short term disability insurance, double or triple the amount that should be taken out for federal income tax, and deferred compensation are just a few of the things being taken out of paychecks.  The crazy thing is, most people don’t even realize or know about these things until someone else points them out.  The point is to know exactly the amount of money you have coming in each month.   That way, you know what amount of money to budget so that you don’t overspend.

Set limits and stick to them

Once you know the amount of money you have to work with, you and your spouse must determine how much is reasonable to spend on each category.  Is $50 each per month enough for blow money to spend on whatever you want?  Maybe $100 each per month is more reasonable.  The same goes for other categories.  Your income and your fixed expenses (mortgage, taxes, etc.) will help determine the amounts.  The most important part is to set those limits and then stick to them.  A budget on paper is worthless unless you actually live by it!

In case I haven’t mentioned it yet, don’t spend more than you make.  It really is that simple.  Is it easy to do in our culture?  Absolutely not.  But it is simple.  Follow the above guidelines and you won’t have to guess on what you should spend, but rather you will know.  Tell your money where to go instead of wondering where it went!