Home budgets can be a very helpful to assist with finances and savings goals. At the same time, they can be very frustrating to track, and life does not always conform to your budget. Many times, the challenge facing a home budget is a cash flow problem. Cash flow is usually reserved as a business finance term, yet the same principles apply to households: money coming in versus money going out with an added dimension of time. In other words, when reviewing a year of income and expenses, one may have the income to support all their expenses yet find the need to always ensure they have cash in their accounts to cover their checks and ETF payments.
A friend of mine was once complaining to me about their finances and said “How come there is so much month left at the end of my money?” This is a common concern for many households, and I’d like to offer some suggestions that can be taken to mitigate the risk of running out of money when an expected or unexpected expense occurs.
Spreading Out Annual Expenses
A large challenge for cash flow is that income can be stable and expenses can appear out of thin air. Your car may need unexpected repairs or a medical treatment is required. Many large annual expenses like school tuition, utility bills, auto insurance, etc. can be spread out over a year with minimal additional costs. Most service providers will be able to establish a payment schedule and allow the expense to be paid over the course of a year.
This may not be applicable with all expenses, and if spreading out payments can be established with majority of one’s recurring large expenses there is a great impact to monthly cash availability for the unexpected and non-deferrable expenses. This will allow you to pay an even amount each month rather than trying to deal with the ebbs and flows of paying a large expense.
Credit Card vs Debit Cards
The benefits of using a credit card and leaving the debit card at home are too many to discuss in this article, so we will only talk about the relevancy to cash flow. When a debit card is used, the funds must be available the same day in a bank account. Alternatively, when using a credit card there is a delay in the time the transaction occurs and when the payment is due. This delay allows time to plan how to cover a large expense.
An additional benefit to using a credit card is that you may be able to apply for a new card with 0% interest charges for a promotional period (I found up to 21 months as of the date of this article). A little foresight is needed prior to incurring a large expense in order to fully utilize this option. The intention is not to forget about the debt until the promotional period is over and regular interest rates apply, rather pay monthly toward this expense and pay off the debt as soon as possible.
Most credit card companies will allow you to choose the day of the month that the bill would be due. Depending on the household’s recurring expenses, one may opt to use a credit card at time of purchase and not have to pay the expense until there is cash in the bank. For instance, let’s say the rent or mortgage payment is due on the 1st of every month, you may want to have your credit card bill due on the 15th allowing two weeks for a paycheck to be deposited.
With additional credit cards, you can split your expenses more and have a due date each week, thus splitting your expenses into weekly payments. At the point of sale, it helps to know when the statement closing date is for each card in order not to confuse them and have a large bill due the week after the rent/mortgage was paid. This can be accomplished by adding a simple sticky label to each card with the dates to use each card (i.e. 1st–10th, 10th–20th, etc.)
Cyril Northcote Parkinson, a British naval historian, is famously known for Parkinson’s Law: “Work expands to fill the time available for its completion.” Many people I speak to share this same theory with their pocketbooks: “Expenses increase to utilize all available resources.” This means that when money is available, it will be spent.
Most bank accounts can be established with a checking and savings account and sometime multiple savings accounts. While the checking account is where income is deposited and bills are paid, the savings account should be reserved for its namesake–– savings. It is beneficial to have an automatic transfer set up so that once a month a small amount ($25 or $50) is moved from checking into savings. The amount should be small enough that it is not anticipated to be needed monthly.
For larger savings goals, a proper method should be established, yet can follow the same guidelines. This amount will start off small and you may feel it does not have an impact. The idea is to not access these funds unless you absolutely need them. This will allow the savings to grow and when an unexpected expense occurs, this money can be used when all other methods cannot be utilized.
In summary, unexpected expenses happen and can be extremely stressful and frustrating to cope with when a payment is due immediately. By using some or all of the ideas presented here, the stress can be lifted and allow for the peace of mind that comes with knowing that there are ways to spread out the expense and not throw you off path for your long- and short-term financial goals.