We are delighted to welcome our guest contributor, Drew Cordell who will be sharing five simple and actionable ways for you to improve your monthly cash flow.
Cash flow is key to creating the fuel needed to save, invest, and work toward your financial goals. Mastering this skill will do wonders in improving your personal finances.
To form a baseline for this article, we’ll need to understand what cash flow is in its simplest terms. Cash flow is the difference of cash-in minus cash-out. In personal finance, it’s helpful to look at cash flow on a monthly basis in all of our accounts.
To figure out your cash flow, it’s recommended that you use a free online tool like Mint or Personal Capital. These apps will help you skip the heavy lifting in the spreadsheet and keep tabs on your monthly cash flow for you.
If your cash flow is positive more often than not, you usually keep more money than you spend. Congratulations! If it’s consistently negative, it means you’re spending more than you’re earning and will need to do some work to try to correct it.
Now, let’s get into five simple and actionable ways you can boost your monthly cash flow and achieve your financial goals!
- Avoid Extra Sources of Debt with Minimum Monthly Payments
- It’s Always Okay to Repay Debt
- Negotiate and Pay for Services in Advance
- Be Mindful of Your Discretionary and Non-discretionary Spending
- Give Yourself Some Leeway
1. Avoid Extra Sources of Debt with Minimum Monthly Payments
Excess debt, especially sources that require minimum monthly payments will eat into your cash flow like clockwork. These types of debts don’t care if your car was damaged by hail, you lost your job, or you’re sick for an extended period of time. The debt still needs to be serviced.
Fixed debts like credit card payments, auto loans, and more recently, buy-now-pay-later installments are a recipe to systematically reduce your monthly cash flow.
The simple math tells us that the more debt we carry, the more interest must be paid on a monthly basis. Interest payments do not go toward the principal we owe and only serve to lower our monthly cash flow.
It’s easy to see why it’s advantageous to avoid additional sources of debt wherever possible. Outside of necessities where it may not be possible to avoid a loan (think housing, sensible cars, and reasonable education), try to avoid carrying active debt that accrues interest on any discretionary spending.
The simple math tells us that the more debt we carry, the more interest must be paid on a monthly basis.
2. It’s Always Okay to Repay Debt
Even if it is ‘suboptimal’ to pay off certain debts, there is merit in reducing debts in favor of improving future cash flow.
The beauty of paying off debt is that you will always get a guaranteed return on the principal you pay down. Investing in risk assets exposes you to risk, as the name would suggest. But you can lock in guaranteed returns equal to the annual percentage yield (APY) on your debts by paying them down early.
Moreover, getting rid of debt provides psychological wins and can help you sleep easier at night. There’s immense comfort in being free from the shackles of debt and getting to a point where you only carry “good” debt.
Every time you crush a source of debt that carries a minimum monthly payment, you free up more cash flow on a monthly basis. That’s less principal you’re paying interest on, and more cash that you can put toward other debts or toward savings, investing, or your other financial goals.
The beauty of paying off debt is that you will always get a guaranteed return on the principal you pay down.
I can’t overemphasize the value of paying off debt. My family has worked hard to eliminate all our debt outside of our mortgage and this makes it much easier to reach our cash flow goals, even with the budget surprises that tend to occur each and every month. I like to say there’s no such thing as a normal month in budgeting, but by having less fixed costs and debt to service, we’re in a stronger financial position for our budget to take a hit without having to tap into our savings.
Think of cash flow as a protective buffer or shield to your savings. It can help protect you from having to draw down against what you already have, even when you’re hit with the unexpected.
3. Negotiate and Pay for Services in Advance
One of my favorite ways to boost future monthly cash flow is to look for ways to pay for the services I would consume anyway in advance. All businesses live and die based on their cash flow. Not enough money and they can’t sustain their operations. Thus, many businesses are willing to give significant discounts if you pay in advance. This improves their cash flow and they’re willing to pass on a discount as a benefit to you in exchange for helping them out.
Many services can be paid in increments of 6 to 12 months at a time and can generate significant savings for you. Yes, you’re taking a hit to your savings in the short term, but it will increase your monthly cash flow since that service no longer has to be paid on a monthly basis. Of course, such a move wouldn’t be logical or beneficial without a discount so this has to be factored in.
Many businesses are willing to give significant discounts if you pay in advance.
Look at the discount being offered by the company and consider the opportunity cost. History tells us that we can earn an annualized inflation adjusted return of 8% by investing in the broader US stock market or S&P 500. I like to use this as a barometer for savings when considering paying for services in advance. If a company is offering less than an 8% discount for paying yearly, I will have to carefully consider my options. More than 8% and it’s likely a good decision.
Here are some common categories that you may be able to negotiate and pay for your services in advance for a big discount:
- Subscriptions (physical goods or digital services)
- Mobile phones and phone plans
- Insurance premiums for home, auto, and life
- Utilities with fixed rates
- Business services
- Annual passes and memberships (gyms, fitness clubs, etc.)
- Cars (many auto sellers will give you a good discount for paying all cash)
- Recurring home services like landscaping, pool cleaning, etc.
- Gift card bundles purchased at a discount from shopper savings clubs like Costco
Not sure if a business offers a discount for paying in advance? Just ask!
As a rule of thumb, you’re only saving money if you would pay for the goods or services in the first place. It’s a good idea to make sure you really need and will use the service for the entirety of the term, especially since many yearly discount arrangements are non-refundable if you no longer need the service part way through the term.
Personally, I’m saving over 20% this year on my car insurance, mobile phone plan, and some of the subscriptions I use to run my business. Paying in advance does incur a larger upfront hit on savings, but it gets me the services I need at a discounted price. Furthermore, I have less cash leaving my account on a monthly basis for the term of the arrangement.
With discounted arrangements like this, you’re essentially buying future cash flow improvements.
4. Be Mindful of Your Discretionary and Non-discretionary Spending
We all have needs, also known as non-discretionary spending categories. We need access to basic and healthy food. We need a place to live. We need transportation to get us to and from the job that provides for us and our families.
But everything is relative. By trying to be more mindful of things we need and sizing them appropriately, we can better improve the chances of keeping our cash flow healthy. There are many budgeting methodologies when it comes to needs and wants, but a good rule of thumb is to try to live below your means.
Take for example your mortgage or rent. If you’re spending 50% of your take home pay just for your base housing, you will have a much harder time maintaining a healthy cash flow. Whereas if you can keep your housing cost (mortgage or rent) at or below 25% of your after-tax take home pay, it will be much easier to reach your cash flow goals.
For the typical family, housing, food, and transportation make up the biggest three spending categories. Looking for ways to reduce spending comfortably in these three areas will do wonders for your cash flow.
Similarly, being more mindful of discretionary spending and making better purchasing decisions will help free up more cash flow. Finding hobbies that are more frugal (or can generate side income) also helps.
I enjoy PC and board gaming, cycling, cooking, reading, and writing. These are hobbies I can enjoy without breaking the bank. By investing a bit of time to dig deeper, it’s easy to find ways to finance or otherwise reduce the cost of hobbies and other discretionary spending. For instance, since I enjoy cooking and have gained skill at it, I can prepare restaurant-quality meals at home for far less money, saving my family money in the long run!
Housing, food, and transportation make up the biggest three spending categories.
5. Give Yourself Some Leeway
Budgets and personal finance math can be cold and calculating, but it’s important that we give ourselves some leeway and grace. It’s okay to not always hit your cash flow goal for the month. Unexpected things happen all the time, and maybe you invested a lot in paying for services upfront in favor of future savings. These things take time to materialize in our finances and the improvement isn’t always visible overnight.
Staying flexible and giving yourself leeway will help you avoid frustration with your personal finances and give you a mechanism and mindset to continually improve in the long run and create sustainable change.
Thanks for reading this article, and special thanks to Mr and Mrs Wow for allowing me to guest post and share with this audience! I hope I have provided some useful ideas on how you can boost your monthly cash flow to improve your financial health.
If you would like to read more of my writing on personal finance, check out my blog: Wealth Orb. I write blog content designed to help people optimize their personal finances and reach their financial goals, all while enjoying the many joys of life. I believe it’s entirely possible to achieve amazing personal finance victories without feeling the pain of sacrifice.