Budget Your Way to a New Life – Part One: Cash Flow
Cash flow refers to how your money moves in your household, from the time it is received to when it is spent. When your cash flow is “positive,” it means you have more money coming in than going out; you are spending less than you take in each month. You want positive cash flow in order to pay for expenses and also save and invest money for goals.
After a divorce, however, you may find your cash flow is tight or even negative. That is, you are spending your cash almost to zero each month or spending even more than you take into the household. To improve your cash flow, here are several steps to take:
1. List all your sources of income.
Your income could include any of the following:
- Spousal maintenance/alimony
- Child support
- Part-time and full-time wages, bonuses and commissions
- Self-employed income
- Rental income
- Investment income
- Pensions or draws from retirement accounts
Different sources of income are taxed differently, so you need to know your true after-tax income. Consult a CPA or financial advisor to learn more about this.
You’ll also need to know how often you receive each source of income and if it’s fixed/guaranteed (paychecks) or variable (self-employment income).
2. Determine your historical monthly spending.
Look back 6-12 months to get an accurate picture of expenses. This could include everything from car or home maintenance to vacations, kids’ sports activities or insurance premiums. Look up spending summaries on your Quicken account or request statements from your bank or credit card companies.
Don’t make yourself crazy trying to document every expense to the penny. Just come up with a monthly average per expenditure (e.g. $1,000 on holiday gifts averages out to about $83 a month).
Reviewing your spending habits can be a valuable exercise. You’ll likely see areas where you could realistically cut spending in order to improve your cash flow.
3. Decide if positive cash flow requires more income or less spending – or both!
There are only two ways to improve cash flow: increase your income or reduce spending. You can increase income by finding a job, increasing the hours you work or finding a different job with a better salary. You could also consider returning to school to train for a better-paying job. Temporary jobs, such as retail during the holiday season, can also provide a cash cushion to meet immediate or pressing needs.
If you are already working as much as you can, then look for ways to cut spending. Divide your expenses into fixed expenses (like rent or mortgage), escrow expenses (such as insurance or taxes), and living expenses (groceries, haircuts, school expenses). It is often in the living expenses category that you can find areas to cut — at least short term — in order to create a more workable budget and money habits. Keep going back to this list and making cuts until your budget is less than your income.
If you are in the habit of using credit cards as your cash overflow account and aren’t paying off the balance each month, this is another sign that you may not have positive cash flow. Stop using credit for any living expenses and give yourself a cash allowance instead. You will quickly assess needs and wants by looking at the remaining cash in your wallet as the weeks go by.
Be gentle with yourself. A new cash flow system takes 30 to 90 days to start showing positive results. Staying in a budget takes practice, but can become fun as you have more money to save for vacation or that retirement dream.
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