Living paycheck to paycheck is hard because there never seems to be enough money, ever. Being “broke” all the time ain’t no fun, that’s for sure. Especially if you make a “decent” income and know you should be doing better. This also encourages the unsustainable use of debt for lifestyle support.
It's not just how much money comes in and how much money goes out. It's also when does money come in, and when does it have to go out? That's called cash flow. If you manage your cash flow properly, you can reduce your stress and survive short term minor financial shocks.
The steps to proper cash flow management:
A lot of times you'll have more dates with money going out than you do money coming in. It’s not just the date when money has to go out, also its relative size to the money coming in has an impact as well. For example when a rent payment requires most of a pay period check.
My first confrontation with cash flow was during my first job. Newly married at 22, totally inexperienced at handling money. While also suffering from early-onset testosterone poisoning better known as “stupid looking for somewhere to happen” that silently infects so many American males. My beautiful young 20-year-old bride did not have much experience with money either. We were properly raised in Black middle class families where money was a closely held secret revealed only on a need to know basis under the penalty of death if revealed to anyone.
I got a job working for 3M Co as a territory sales rep. In 1973, my starting salary out of graduate school was $800 per month, paid once a month at the end of the month. That was all the income we had. Besides the salary, the job came with a company car. And they also reimbursed expenses bi-weekly, such as gas for the company car and meals with clients.
Being paid once a month will force you to learn how to manage money. Unfortunately, we made a ton of errors on the way to that knowledge. There was always seemed to be “a lot of month left at the end of the money.” It was a stressful way to live and led to an unmanageable debt load that would accompany us for years. I remember one particularly painful month when my wife made a simple arithmetic mistake in the check register. (These were the days before digital calculators, nevertheless ATMs, computers, or apps.) The account was overdrawn and there was nothing that could be done about it until next payday. Of course, the bank had no problem racking up overdraft fees throughout the month and immediately subtracting them from the next deposit. This made a bad situation worse and prolonged the pain for additional months.
I left that job for another job that paid more money more often, from once per month to every two weeks. The biggest change besides the slightly larger income was going from 12 to 26 paydays per year. That change lowered our stress and increased our capacity to save aggressively and spend wisely.
You can also use your credit card to control due dates. This is a strategy that is especially effective with multiple cards and delivers rewards as well. Remember cash flow is impacted by how much goes out and also when it goes. Using a credit card to pay an obligation can effectively extend its due date and allow you to retain your funds longer. Using a series of credit cards with rotating closing dates to pay routine obligations such as utilities, insurance premiums, etc can improve your cash flow and buffer unexpected increases. To use this strategy you must pay your credit card statement balance in full each month by the due date.
The 3 fundamentals of good cash flow management are simple and evergreen:
Financial shocks are inevitable during a lifetime. “Stuff happens” according to the PG-rated version of that cliche. When it does my language is more NC-17. Nevertheless, happens it does. The most common financial shocks for working-class families are:
What is an emergency fund? It is a "liquidity buffer" between you and ruin. If you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. It can be any of these items. Some are decidedly better options than others:
Forget the 3 to 6 months of take-home pay that is commonly parroted throughout financial media and literature. This goal is often unattainable for low-income wage earners. A more realistic minimum target is $2,467. A fund of this amount will be sufficient for most emergencies. Having such a fund stops you from getting stuck with short term remedies with long term consequences like being late on rent or borrowing from a payday lender. Often creating a cycle of cash draining late fees and prolonged financial insecurity.
Building an emergency fund is your #1 priority. You should well establish an emergency fund before you divert resources to the very prudent debt reduction strategy necessary for your long term success. You should continue or start making all minimum payments on time and continue to do so until your emergency is well funded.
Debt reduction is achieved by consistent application of payment to the principal balance. Having an emergency fund will let you maintain a good payment history so you won’t have to “rob Peter to pay Paul” when the inevitable happens. One missed credit card minimum payment can close off what may be a critical asset during a financial emergency and put a big hole in your safety net. Modified universal default terms may render a late payment to one lender a catastrophe in your creditworthiness regardless of your actual payment history.
Your ability to borrow should be viewed as part of your safety net. It creates capacity and demonstrates financial capability. Your credit card cash advances and spending limits arecritical components that can be managed to help mitigate some of the impacts of an emergency and buying you time. An excellent credit score can give you immediate access to additional money during an emergency. It is a MoneySmartLife strategy to responsibly and proactively expand your borrowing capacity annually. Just as your net worth expands annually so should your credit capacity. They weave your safety net tighter and softer.
Most employees unnecessarily leave money on the table when it comes to their compensation by not maximizing their employer-provided benefits. According to the BLS, 30% of your compensation is benefits. Let’s look at some strategies to get the most out of your benefits for the rest of this year.
But first a rant about paid vacation days. I realize that 1 in 4 American workers don’t get any paid time off at all. The rest get paid vacation “yet only 51% of paid vacation days are used! More disturbingly (if not surprisingly), 61% of those who do take vacation are “working while on vacation.” Americans left 768 million days of paid time off unused last year, according to research released by the U.S. Travel Association. The study found that 55 percent of Americans did not use all of their paid vacation time.” Why would you do that? Seriously, ask yourself, “why would I do that?” What are the short/long term benefits of this behavior?
Here is what to do for the rest of this year. The best time to do this is around October 1. This will give you flexibility before that end of the year time crush everyone experiences. Also, it gives time for any changes in your withholding strategies to take effect and return the expected benefits. Of course, these strategies can be implemented anytime.
Credit diversity or “types of accounts,” in credit report speak, is a minor factor that determines about 10% of your credit score in most scoring models.
It measures how you have handled different types of credit accounts, currently and over time. Since it is measured by the scoring models, it also can be managed or influenced by you. Like most things related to credit scores, it is best accomplished over time and with a strategy.
There are three types of accounts credit scoring algorithms consider:
What Is NOT Part of Credit Mix?
Best practices to optimize credit diversity