10 Tips for Improving Your Cash Flow


Cash flow – how money flows in and out of your household – is key to achieving personal financial security. Without a well-managed and understood cash flow, you're less likely to be able to fund short-term and long-term financial goals. Unfortunately for many of us, the cash flows out as fast – if not faster – than it flows in. Often we don't even know where much of it goes, which can create anxiety. Here are 10 ways to better manage your cash flow that can help improve your disposition and make those goals come true.

1) Make a spending plan. Write down in a simple accounting book all monthly income (salaries, pensions, Social Security, investment earnings, child support) and expenses (housing, car, taxes, groceries, clothing) for the past 6 to 12 months using checkbook records, pay stubs, and so on. Track current spending for another two or three months, particularly those cash expenditures that often go unaccounted. If you're spending more than you're bringing in, identify excessive spending categories and cut back until inflow and outflow match.

2) Set goals. Write down your goals, such as paying for summer camp, buying a new car, or saving for retirement. How much will each goal cost (factor in inflation for longer-term goals) and how long will you have to save toward each goal? Calculate how much you'll have to put away each month to reach each goal.

3) Adjust cash flow. Can you put away enough each month to meet all your goals? If not, you have three options: increase your income, readjust or eliminate some goals, or lower expenses in other categories to free up money for your goals (eat out less, buy a cheaper car, entertain at home). Don't try to accomplish everything at once. Gradually work goals into your spending plan.

4) Pay yourself first. When you receive your paycheck or other income, pay your fixed expenses, short-term savings, and long-range goals first. That way, if things get tight during the month you'll cut back on discretionary spending, not your mortgage payment or college-education fund. Automatic deposits help make this process less painful.

5) Set up accounts for variable expenses. Insurance payments, for example, may come once or twice a year. Divide the total annual insurance costs by 12 and set aside that amount each month in a savings account that you can draw on when the bill comes due. This helps even out monthly cash flow.

6) Establish an emergency fund. Set aside enough money in a safe and accessible account to fund "bare necessity" living expenses for three to six months.

7) Alternate raises. Put your next raise or bonus toward a goal, not your day-to-day spending. The next raise or bonus can go toward improving your standard of living. This way you can help save toward your goals and still have fun.

8) Involve the whole family. Include your children. Everyone has to sign on to make the spending plan work.

9) Pay off credit cards. Misuse of credit cards sabotage cash flow more than any other single factor.

10) Have some fun with your money. Free up some of your cash so you can do fun things. Give everyone a little "personal money" they don't have to account for. This is a spending plan, not a starvation diet.