Our personal cash flow is the underlying tool we use to achieve our financial goals. A salary or some form of compensation for performing a job is typically the most common form of personal cash flow. On a monthly basis, we decide what to do with our cash flow and how it’s allocated ultimately determines whether we’ll be successful. Regardless of how high your income is, if everything is spent on a month to month basis, there isn’t any room to save, invest, or pay down debt. It’s the very definition of living paycheck to paycheck, which no one wants to do! We all strive for the peace of mind financial security can bring. The key to achieving that peace of mind is through gaining a better understanding of your cash flow, allocating it in accordance with your goals and priorities, and ultimately finding ways to increase your cash flow!
Get a Grips on Your Cash Flow
It’s likely you understand what your salary or annual compensation is for your job. That could include a base salary that’s very dependable on a month to month basis and some form of equity compensation such as RSU’s or stock options which can be more variable and dependant on the company’s performance.
Often times, I find, it’s not as likely for people to fully understand where their monthly cash flow is going. Maybe they’re contributing 10% to their 401(k), contributing to a health savings account, and occasionally setting aside cash into a savings account to ultimately be used for a large savings goal such as a down payment. While this picture does provide some context as to how this hypothetical person is using their monthly cash flow, it doesn’t provide the details that are necessary in order to fully understand and allocate cash flow correctly in accordance with goals!
It’s also necessary to understand WHERE, WHY, and HOW MUCH money you’re spending on a monthly basis, as it’s an important component of monthly cash flow. As discussed in the intro paragraph, if everything is spent, there’s nothing leftover to be used towards goals! Going through a budgeting exercise to understand whether you’re spending in line with how you actually want to spend your available cash flow AFTER other goals and priorities are taken care of is key.
However, without jumping ahead of ourselves, I always recommend to tackle the savings, investing, and debt pay down rates first. If these are taken care of, you should feel comfortable spending whatever’s left each month on living and variable expenses such as vacations, eating out, or whatever it is you most enjoy. While there isn’t a perfect percentage of monthly cash flow that should be allocated for long-term investments, short-term savings, or debt pay down, the more you’re able to put towards these goals the more likely and faster you will achieve them.
Once you understand how you’re currently managing your cash flow, you can begin to explore ways to increase it!
Reduce Variable and/or Living Expenses
First, an obvious way to increase your cash flow is to simply reduce what you’re spending on living expenses and/or other variable expenses each month. Through a budgeting exercise, you may identify things you’re spending money on that you regret or that don’t necessarily add much value to you. If that’s the case, cut it from your budget!
Another way to “force” yourself to spend in line with your budget and to increase cash flow towards other goals is to automate all your savings, investments, and debt pay down. That way whatever’s leftover each month is what you know is available for variable expenses. If you only spend that allotted cash using a debit card or actual cash, you can force yourself to spend within that budget.
If you own a home, rental property, or have aspirations to do either, it can be a great way to build your cash flow. It’s easier than ever to rent out a room, or entire home using tools such as Airbnb. If the rental income is greater than what you pay for the mortgage, insurance, property taxes, and any maintenance and repairs, then you’re essentially increasing your cash flow. Whatever is left over can be used towards other goals.
What I’d be wary of in building rental income is it’s a concentrated investment. If the real estate market in your area experienced a downturn and you used debt to fund the purchase, you could potentially be at the mercy of the housing market. If rental prices go down as well, you could potentially not cover all the fixed expenses associated with the property and essentially have an investment that’s performing negatively in the short-term.
It’s also important to factor all those expenses associated with homeownership into the equation when comparing apples to apples with what your cash for the down payment or equity in the home could have done INSTEAD. For example, how would it have performed if those funds instead were invested in the market for the long-term?
Rental income can be a great way to increase your cash flow, but it’s a strategy I’d more likely recommend to someone who already has solid financial footing and is looking to “diversify” their overall investment portfolio.
Dividends and Interest
Investments in a taxable account using stock, ETF’s, index funds, mutual funds, or bonds all payout either dividends (equities) or interest (bonds). While it’s more common for retirees to depend on this form of cash flow once they’re withdrawing from various accounts to support their lifestyle in retirement, all investors benefit from this form of increased cash flow.
For younger investors or anyone not in the distribution phase of their portfolios, you’re better off reinvesting the dividends and interest to aid in the compounding the investments will experience over time. Ultimately, providing a larger nest egg for when you do need the funds.
Through investing, you’re essentially increasing monthly cash flow, even though it’s likely being reinvested for future use.
Every year you likely have a compensation meeting, performance review, or are potentially up for promotion. All are great times to re-evaluate your compensation with your employer. Understanding the value you provide, using alternative offers, or having some sort of leverage to help aid in negotiations can help increase your salary or equity compensation, ultimately increasing your cash flow!
From an employers perspective, as long as the ask isn’t egregious and within reason, I would say more often than not they’re willing to have wiggle room with compensation. It’s vastly more expensive for them to potentially lose a good or great employee, spend the time to find a replacement, and train the replacement than to simply pay a good or great employee more.
Start A Business or Side Hustle
Do you have a unique talent, idea, or skill that could be put to use in the gig economy? If so, consider starting a business around the idea, or putting your skills to work as a contractor can help create income in addition to your job. Consider reinvesting the cash flow from a side hustle and it could eventually create further equity in your business. The business itself is worth something, and the skills you learn and practice are all worth something!
In turn, this continual “upgrading” of your business or skills indirectly affects your cash flow in ways that can’t immediately be recognized.
If you decide to use the cash flow outside the business or side hustle, you can immediately see the return. Whether that newfound cash flow is used for long-term retirement savings, home downpayment, or paying off student loans, it helps accelerate your progress towards achieving them.
The Bottom Line
How we manage our cash flow today on a month to month basis will ultimately determine whether we’re successful in achieving all that we want. Whether the ultimate goal is to retire early at age 50 or to purchase a vacation home, the money we have available today and allocating it efficiently to work on its own will help make those goals possible. If we’re able to increase our cash flow, the tool becomes that much more powerful!
Do you need help understanding your cash flow or getting a plan in place to begin working towards your financial goals? If so, schedule a free consultation today!
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!