As we close out the year 2018, I want to take a moment to look at the subject of cash flow vs credit. Everyone is talking about credit and having a pristine credit score that will make it easier to buy money to get stuff we can’t really afford unless its spread over the course of 10, 72, or 360 easy payments. America seems happy to trade a seemingly small variable fee for the cash right now to buy the things we want. According to Nerdwallet.com The average amount of debt per household in America is $135,768 and rising. The average American Income is just shy of $60,000. With debt more than double the income it is obvious we have a major cash flow problem, and we can’t afford the things we want, but we buy cash, (via credit cards and loans), at a high price to get them anyway, and we continue to do this repeatedly as a nation.
I propose that instead of using credit to buy things you can’t afford, fix your cash flow issue instead. It’s simple math if more cash is going out than you have coming in, then you have a cash flow issue. Using credit to supplement your income deficit is not good financial planning and there are only 2 ways to fix it.
1. Stop spending so much. Plug the hole in your cash flow drain by spending less.
Look for ways to reduce the amount of money you spend each day, so you will have more money to buy the things you want.
2. Find a side hustle, is there a way to monetize your gifts or passion? Can you invest your time to learn a new skill that can be profitable and increase your cash flow?
I know you probably just read that like, Ummm okay duh! How will that help me stop using credit and start using cash to purchase the things I want? The short answer is you simply can’t afford all the things you want. You must start living within YOUR means, not your neighbors, friends, or families means, but yours. Be courageous enough to stop using credit to look rich, while living broke.
The use of credit for non-appreciating assets is creating the feeling of artificial wealth. I don’t know about you but, I don’t want to “feel wealthy” I want to be wealthy. Removing the crutch of credit will force you to become more innovative, and strategic in increasing your cash flow so you can live the life you want without having to depend on credit to make ends meet.
Here are a few simple ways to start your cash flow correction. Remember we are focusing on your needs because if you are using credit to finance your wants you can’t afford to want anything yet. So, let’s first discuss how to get our needs met in the most affordable way. The good thing is, we only have a few things we need, and the rest is all a luxury.
1. Shelter- Share your living space with someone else for as long as you can to save as much as you can. Splitting the bills is one of the easiest ways to save money. Will Mom and Dad allow you to live rent free for a while in order to save up to buy your own starter place? Can you spread the cost of rent and groceries across a group of several roommates?
2. Food- Prepare more meals at home and reduce the amount of convenience food purchases you buy. Only buy produce in season and on sale. Pack your lunch, simply packing your lunch 5 days a week one year can save you over a $2,000.
3. Clothing- Shop on websites like Ebay.com for shoes and, and accessories.
Use Consignment shops and thrift stores for everyday pieces.
Host a clothing swap with your friends to switch up your wardrobe.
4. Transportation- pay cash for a car and buy as much car as your cash can afford you. If that car is only an $800.00 car, then drive that car until you can afford more car. Carpool, or ride your bike, or walk for errands to save on fuel and wear and tear on your car.
5. Savings- yes you need to save for an emergency just in case you don’t have any cash coming in. The easiest way to save is by paying a little cash to your savings account first before anything else. Or you can take care of your needs first and stack what’s left in your savings stash. It’s up to you.
6. Increase your cash flow - Once you have your basic needs balanced, look at your current job, are there opportunities for advancement? Can you ask for or earn a promotion? How about asking for a raise? If that’s not an option perhaps monetizing your hobby can help make the ends meet. If you are good at something other people are not, charge people for it.
7. Consult with your tax professional on how to reduce the amount of income taxes you are paying each pay period. Sending more money to Uncle Sam all year may result in a larger refund come tax time, however, you need that money all year long in your pocketbook. Most tax refunds are a direct result of overpaying, and we don’t want to overpay for anything.
If you are already in debt these tips can be used to bring balance back to your finances. Begin to focus in on the wants versus needs and freeing up more cash to pay off the debt you have already accumulated. This will help you to avoid the interest charges and fees and cut the cost of your credit down.
Sound personal financial planning should include a solid debt avoidance, or debt reduction strategy. Proper cash flow management paired with the psychology of dealing with your needs and your desires can eliminate the need for excessive credit usage. As you begin to rely more heavily on your cash position, having an 800-credit score won't tickle your fancy as much. You can become your own bank, and you won't wish to allow the big bank to take all your money in fees for using their money. Use your own money, buy what you can afford outright, and you will begin to turn your cashflow into a wealth position. Your credit score will not matter as much as your wealth score when you own more than you owe.
To calculate your personal wealth score visit, https://americasaves.org/for-savers/savings-tools-and-resources/personal-wealth-estimator