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5 Tips To Increase Your Cash Flow

July 16, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

After correcting for inflation (perhaps the greatest current economic threat), the median incomes are below where they were in 1999 according to the Census Bureau. When faced with a budget deficit, there are two basic solutions: reduce expenditures and increase income.

The biggest caveat (and this is an important one), “making more money will not solve your problems if cash flow management IS the problem.” (The Cash Flow Quadrant)

House and Car Poor
It is usually a sad experience watching my friends purchase cars. It’s just that I repeatedly see the same mistakes over and over: paying too much, financing, and leasing. Some make the same mistakes with their homes too.

Your mortgage or your rent should not exceed 30% of your income. If you are more conservative and can swing it fiscally, I would suggest not exceeding 25%. Moreover, vehicle costs (including repairs & gas) should not exceed more than 10% of your income, and the overall value of the sum of your vehicles should not exceed 50% of your annual income.

It is so easy to sweat minutia while missing these big cash flow drains.

Not Distinguishing Between Needs and Wants
Here is where many people miss it. You may need a car, but you do not need an Aston Martin or Mercedes. There is nothing wrong with wanting and purchasing nice things as long as you can afford them.

Occasionally, I watch Suze Orman’s Can I Afford This segment on CNBC. This is where viewers call in, detail their finances, and then ask Suze if they can afford a purchase. It always amazes me how irresponsible some of the purchases are. The specific item the callers want really does not matter that much. The core issue is silencing that inner child long enough to build some real wealth, so you can have some fun. It is a sad day when you are suppose to a few years away from retirement, but a $5,000 watch is still beyond your grasp.

By focusing on needs and purchasing wants as you can afford them, your prosperity will grow remarkably in speed and magnitude.

Monthly Payments vs. Total Cost
One of the greatest shifts in thinking, due partly to shrewd marketing campaigns, is to get consumers to focus on monthly costs instead of the total cost. No longer do people “ask can I afford this” but rather “can I afford the monthly payment?” It is designed to get well-meaning consumers to part with more of their hard-earned money.

Not only do these consumers usually end up paying more for the item they are purchasing (rent-to-own, car loans, student loans, credit cards, etc), the opportunity costs are tremendous. You literally lose hundreds of thousands (millions in some cases) by focusing on monthly payments instead of total costs. By design, the goal is to get you to spend tomorrow’s prosperity today.

Living Without A Budget
This one is so important that I wrote a an entire series and an ebook on the subject. This affects people at every economic level. Whether you make $40,000 or $400,000 a year, you can still be broke by failing to track your finances. You have to know where your money is going in order to gain control and bring order to your finances. Additionally, budgets also free up extra money and time. Budgeting is absolutely imperative to the financial health of your family.

Not Having An Emergency Fund
It really doesn’t matter what you call it: cushion, retained earnings, rainy day fund, or emergency fund. You need some protection from life, and an emergency fund is the answer. Living without an emergency fund is analogous to hanging on a cliff: it is only a matter of time before any disaster can make you fall. When that unexpected expense comes up, your cash flow will suffer if you are not prepared.

It is true that through meticulous planning (i.e. having a car and home maintenance funds), you can likely reduce the emergency fund from the standard 3 to 6 months (some even suggest 8 -12 months now) worth of expenses. However, for most people, a simple emergency fund will suffice.

Lastly, if you like this post, please click here to get my Brand New eBook FREE and Propel it, Stumble it, and tag it on Delicious.

Are YOU In Recession?
Free Yourself From Babylon
Budgeting – Your Foundation For Wealth (Part 1)
Falling off the Cliff