Cash Flow
I look at cash flow from two sides. The long term tells me where I’m going–am I eventually going to build any wealth, or am I continually digging a deeper and deeper pit? The short term has to do with crisis management. I think of it as two separate but similar tools.
First the short term. On paper I make enough money in a year (with the student loans included as income) to cover all my expenses and feel modestly comfortable. In reality, that hasn’t been the reality, so what’s going on?
I have a cash flow problem. I actually have two cash flow problems. The second one (the long term pit digging problem) comes from the first problem, which is that bills come due before I get paid.
This problem took me a lot a head scratching to figure out, but I finally get it. Here’s what it is and how I’m tackling it…
This problem can take a bunch of horrible forms. In my case, because I’m a grad student (more later on man’s inhumanity to grad students), I get paid three times a year, at the beginning of each term. This creates the opportunity for a big problem. In theory, it should be alright…I should pay out all of my expenses for the term when I get paid and live on what’s left. The problem is that I start each term in the hole, and after I sit and think hard about paying all the basic expenses, there’s nothing left. Note I said think about paying. Still, on paper, I should be able to cover everything, so clearly I have a problem. The main problem, I finally figured out, is that when I moved here to start school, my savings didn’t cover the whole cost of the move. I feel the need to insert here that I have a family (one adult, one income), so I’m always talking about the expenses of a household, not an individual, which are indeed bigger, but the stipend is set for one person in their early 20s to live on meagerly. It makes it easier to understand why my math might seem weird, and, well…that’s my windmill to tilt at.
Back to the move. It took me forever (let’s have a big duh) to figure out that I made up the difference in the cost of the move out of my first stipend here, and I’ve been carrying over the deficit ever since. Which is why I’m always in the hole. Sounds stupid? That’s negative cash flow. Most people probably have some. I should qualify that. People who are not increasing their wealth have negative cash flow.
Carrying a deficit means you’re paying expenses from a previous budgeting period out of a new budgeting period, so even if things look alright on paper for one budget period, they’re not alright. The deficit is always following you. This could be a late credit card payment, utility payment, rent…you name it. You’re always borrowing from your future self. Not good. You have to pay yourself back. That’s my deal right now.
Step one is figure out how much of a deficit you’re carrying over. That is going to have to be factored into a new budget to pay it off. I hate to say it, but it’s probably going to hurt. For awhile. Then it will get better.
The next part of short term cash flow is tracking when money comes in compared to when it needs to go out. As I understand it (which is admittedly limited), corporations deal with this too, and they sell bonds to cover their short term cash flow needs. I’m very disappointed that I can’t issue commercial paper in my own name, but whatever. It helps to know I’m not alone, I just don’t have access to capital markets.
The next step is to make a calendar showing when money is coming in and when it has to be paid out. This will reveal the cash flow crisis points.
Two points here. If you’re cutting it really close to the line and going actually negative, as in no money, 1) it bites, 2) it’s expensive. It’s expensive in fees, over limit fees, overdraft fees, loss of dignity, and usually a ruined manicure. Those fees would be better spent elsewhere. If you’re not actually going negative in terms of money you can get your hands on, but you still have a negative cash flow, you’re probably making up the difference in credit and debt spending. For that reason, it’s an excellent idea not to gauge your financial health (or self esteem) on how other people look like they’re doing. It’s a great idea to let go of the idea that you need to spend according to someone else’s standards. You have no idea what kind of hole they may be digging.
Back to the tools at hand. I keep it simple and use Excel. I’ve used Quicken too, and that works for me. The key is simple. Paper and pen and a ruler work too.
Across the top of the page (spreadsheet, whatever), mark the dates. It’s usually good enough for me to do it by month. If you get paid bi-weekly, use your pay dates. Note that if you do not get paid on a calendar date (the 1st, the 15th), that can really mess with your cash flow and budget. Bi-weekly pay does not exactly match to a monthly budget. More on that elsewhere, but consider it.
On the left side of the page, make a row for income. Below that, make another row for expenses. Now fill in exactly when you get paid and how much (after taxes), and exactly when things need to be paid and how much. It’s a good idea to make one sheet that has all the days of one calendar month, so that things are clear. If you get paid on the 15th, but a credit card bill is due on the 13th, and you’re waiting for your paycheck to pay it, that will incur a late fee, and that’s probably not in the budget.
Make another row below the others. This will be your running balance. Subtract your expenses on the day they are going to be paid from your balance. If at any point the numbers go negative, then you have a negative cash flow situation.
This can be dealt with by checking to see whether any of the dates can be altered. If a payment can be delayed without incurring a fee, that is one option. Some utilities and credit cards will let you choose your due date. If you can make the dates match, you can avoid the fees. If you can’t, you have to consider where you will make up the difference. This will mean revisiting the budget.
The long term aspect of cash flow is actually much simpler, because it emerges from the short term. If you finish a budget period with cash left over, you have a positive cash flow. Woo hoo! Invest that. If you end a budget period underwater, you are borrowing from yourself somehow to make up the difference. Your future self should be a bit upset. No good comes from that. Positive long term cash flow comes from consistent short term positive cash flow.
Also, one other thing. Pay yourself first. During an all out emergency…maybe there are other priorities. But if every month is an emergency…well, that’s just too much stress. Back to the budget.
