One of the most common reasons businesses fail is due to lack of understanding of cash flow. The same can be said about your household’s personal financial statement. So what is this cash flow concept, how does it apply to you, and what are some ways to improve yours? In Part 1 of this two-part article, we explained explain what cash flow is and how to determine your cash flow. In Part 2, we’ll give you some ways to improve your cash flow.
Identify your challenges. See if you have months where more cash is going out than is coming into your bank account. This is often when large bills are due. Try to balance these known high-expense months out over the year if at all possible. Common causes are:
- The holidays
- Property tax payments
- Car and homeowners insurance
- Annual income tax payments
Build a reserve. If you know there are challenging months, project how much additional cash you will need and begin to save for this reserve in positive cash months.
Cut back on annuities. See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add-ons? How about cutting costs in your cable bill? Is it time for an insurance review?
Shop your current services. Some of your larger bills may create an opportunity for savings. This is especially true with homeowners and car insurance.
Don’t confuse savings with cash flow. Think of your savings as the accumulation of positive cash flows from prior months. A high savings balance can often mask a monthly cash flow problem where more is going out than is coming in over a period of time.
Create savings “expense” to add to cash flow. Consider adding a “bill to yourself” in your cash outflows. This money saved is a simple technique to create positive cash flow each month to build an emergency reserve.
Last week we gave you the first half of a list of essential economic concepts that every high school student should understand. Here’s the second half of the list!
The strength of investing – The most valuable investment a young person can make is in themselves. Whether it is a college degree or a trade school diploma, your child can create tremendous value in skills that will provide a positive financial return each year.
Mutual fund and stock understanding – Once your child grasps self-investment, next consider teaching some of the basic investment alternatives available to them. Stocks and mutual funds are the most common, but also consider explaining bonds, CD’s, annuities and other investment tools.
Budgeting – Help your student create a basic budget and then help them track their saving and spending against the budget. Don’t forget to mention an emergency fund to prepare for the surprises in life.
Cash flow – The hard way to learn the lesson of cash flow is when bill collectors are calling and there simply isn’t money to pay them. When creating an initial budget, show your child the flow of funds each month. An easy example of this is to show the flow of funds that relate to car. There are everyday expenses like fuel, there are monthly expenses like a car payment or insurance, and there are periodic expenses for licensing and maintenance.
Calculation of net worth – Assets (what you own) minus liabilities (what you owe others) equals net worth. This is the math of banks and businesses. The sooner your child understands this concept, the easier it will be to plan to purchase a car, a house, or any other item of value.
The value of identity – The value of a personal identity is the most undervalued asset owned by your child. Online media may seem free, but your child has paid for this access with their identity. With the advent of identity theft, government/employer access to personal online information and the proliferation of online advertising, consider helping your child understand the value of having a small online footprint. Help them establish healthy habits that will protect their personal information.
I hope you find this information helpful in preparing your child for a sound financial future.