Cash is King

You have probably heard the old adage that cash is king.  This is true whether you are running your own business, managing your household finances, or are an investor on the lookout for attractive investment opportunities.  If you are a business owner you need sufficient cash to meet payroll obligations, buy merchandise for resale, purchase raw materials for manufacturing, and meet your expenses.  If you manage your household finances you need cash to pay your bills, save or invest for your children’s education and your own retirement.  You need cash for discretionary expenses such as vacations and entertainment.   Finally, you need cash to take care of emergencies like home and auto repairs and unanticipated medical bills.

For many of us cash is what we have left after receiving a paycheck and paying our bills or worse yet we have no cash left.  Do any of the following apply to you?

·       You have credit card balances carrying high interest rates 

·       You are making the minimum monthly credit card payment rather than paying off the balance each month and avoiding exorbitant interest charges.  

·       You are robbing Peter to pay Paul. 

·       You do not have an emergency cash fund available to cover expenses if you are laid off or can’t work. 

You are probably not managing your cash flow if any of these describe you.

Here are 6 tips to help you better manage cash flow:

1.     Learn where your money is going by tracking your expenses for the last 12 months.  Use this data to create a budget for the next 12 months.  A 12-month period is useful since some expenses are not incurred monthly, but occur quarterly, semi-annually or annually.

2.     Consider refinancing your mortgage (interest rates remain low) and consolidating high interest credit card debt.  Managing your debt is an important element of cash flow.

3.     Build an emergency fund with three to six months of living expenses.  This is a rule of thumb and depends upon factors like job security, whether your family is a two income family, or has other resources available such as a line of credit.

4.     Pay yourself first even if you have to start with a small amount.  Make it a habit.

5.     Check your income tax withholdings.  Getting a big tax refund after you file your tax return is no way to save money.  Uncle Sam does not pay you interest so why make an interest-free loan to him?

6.     Seek help from a financial planner if necessary.  The planner can often find solutions to increase your cash flow that you would have never thought of, and develop strategies to give you financial peace of mind.  Be sure to check out my blog post, “Why a CPA Financial Planner” (2/14/13).

Gaining control over your cash flow is one of the most important steps in financial planning.