Cash flow planning is all about budgeting. Knowing when your bills are due and having the cash on hand to pay them without getting into debt. This pillar of financial planning focuses on reducing expenses and maximizing your cash flow.
By placing emphasis on cash flow management, we hope to educate you on topics that might affect your cash flows – inflows & outflows such as:
- Salary
- Rental Income
- Business Income
- Interest Income
- Dividends Earned on Investments
- Monthly Expenses,
- Utility Bills
- Insurance Premiums
- Credit Card Debt
- Mortgage Debt
Cash Flow Management Tips
Below are common and popular tips that you could utilize to manage your cash flow more effectively. Knowing how to allocate your funds, paying down high rate interest debt and establishing an emergency fund will prepare you for the uncertain and allow you to manage risk effectively.
50/30/20 Principle
A good way to keep track of your cash flow is following the famous 50/30/20 budget principles Put 50% of your net pay towards staple payments such as housing, utilities, transportation and recurring payments, 30% toward wants (dining, out, clothing, entertainment) and 20% towards savings and debt. Each person is different so embrace the ratio that you’re most comfortable.
Emphasis on High Interest Debt
A crucial step to any financial plan is to pay down the high interest debt such as credit card balances, payday loans, title loans, rent to own payments. Interest rates on these debt obligations can be as high as 20%. It’s very rare to earn 20% a year on your investment unless you’re comfortable with speculative risk.
The Emergency Fund
One of the most important things of any financial plan is putting cash away for emergency expenses. Make sure you have enough cash put aside to cover 3-6 months of expenses. Money market funds, Canada Savings Bonds, cashable, GICs and even lines of credit are all suitable vehicles for emergency fund planning.