Chapter 7
Controlling Your Cash Flow
In This Chapter
◆Increase discretionary income, reduce debt
◆Fixed expenses and variable expenses
◆Tips for increasing your income
◆Tips for decreasing your fixed expenses
◆Tips for decreasing your variable expenses
The most important thing I’ve learned in all my years of school, training, and professional experience can be summed up in a phrase uttered by my final college professor. He said, regarding everything from large corporate budgets to our personal finances, “Cash flow is king.”
In other words, those who have more money “flowing” in than out will ultimately control their destiny. Those who run a negative cash flow each month will become subject to others (in the form of debt).
Never is this so true as for those of you reading this book. You’ve found yourself in a situation where you are enslaved to balances you owe someone else. To break free, you must minimize those balances. Short of winning the lottery, the only surefire way to lower those balances is to increase your net cash flow each month.
Discretionary Income Is the Key
With an increase in positive cash flow, you can direct more toward your debt. The more debt you pay down, the less interest accumulates during the following week, month, or year. The less interest accumulates, the greater the amount of your next payment that gets applied to the balance, and so on.
By increasing your positive cash flow, you can ultimately increase your debt payments. Instead of being caught in a downward and negative spiral, you find yourself in a positive, upward spiral. There is a name for this “positive cash flow” that you need to increase in order to eliminate your debt. It’s called discretionary income.
While the term sounds complex, it’s simple when you stop and think about it. It’s the income that’s left after all your required bills have been paid; you choose how to spend it. To accelerate the process of getting out of debt, you ultimately have to increase the amount of discretionary income left at the end of the month.
In the Red
Nonsufficient fund (NSF) fees on your bank account can actually cause you to start the month with a negative balance in your bank account. This can put you into a cycle where part of each paycheck immediately goes to pay your negative bank balance and the mounting fees. Consider using an FDIC-insured bank that doesn’t charge overdraft fees or that offers an overdraft protection. Doing so can protect hundreds, possibly thousands, of dollars in cash flow each year.
The Formula for Discretionary Income
Calculating discretionary income is simple. There’s no need to get out your protractor or call your friend with a Ph.D. in Economics. It’s a simple three-part formula that requires basic arithmetic. Once you burn this formula into your brain, you’ll begin to see every dollar that flows in and out of your household in a different light.
Discretionary income is calculated by taking your household total income and subtracting two kinds of expenses from it: fixed and variable expenses, which I’ll discuss in a moment.
On paper, it looks like this:
That’s it!
Dollars and Sense
If you consistently get a tax refund every year, it means that you are having too much withheld from the paychecks that come into your household. While it’s always fun to have the government hand you a big check, it essentially means that you’ve loaned them some of your discretionary income, interest-free, for a year or more! If this is your situation, you need to talk to your accountant, financial planner, or employer about adjusting your withholding on your W-4. To calculate the correct number of exemptions to report on your W-4, visit the IRS website at www.IRS.gov and use their online withholding calculator.
Fixed vs. Variable Expenses
While you could just lump all expenses into one category, I think it is crucial to separate them. The reason for this separation has to do with how you spend money, and more specifically, how you chip away at your discretionary income.
Fixed expenses are not just those expenses that are the exact same amount every month, but they are the ones that don’t change if you are reckless, lose control, or rationalize. Essentially, you pay them every month and the amount due isn’t determined by your emotions or psychology. Some examples of fixed expenses are rent or mortgage, car payments, utility bills, and tuition.
Variable expenses, on the other hand, are expenses that can vary widely from month to month, depending on your money attitudes and willpower. When you’re having a hard time breaking even each month, much less creating discretionary income to pay off debt, variable expenses are usually the culprit. Variable expenses can include things like clothes, dining out, groceries, gifts, and leisure activities.
Ways to Increase Discretionary Income
If there is a punch line to this book, a must-do for your action plan or a secret to getting out of debt, increasing your discretionary income is it. You’ve got to make this your central mission. You need to realize that every dollar flowing in and out of your household affects your discretionary income.
With that in mind, there are only three real ways you can increase your discretionary income. While there might be a million different tips and tricks, they all still fall under one of these three categories:
• Increase your household income. If you increase the amount of money coming in, there’s a good chance you’ll increase the amount of money left over. But it’s also one of the hardest things to do. It requires getting a raise or second job, or developing some type of passive income like owning rental property.
• Decrease your fixed expenses. Our fixed expenses are often some of our biggest, which means we can make a huge impact on our discretionary income by lowering them. But finding a lower-rent apartment, getting rid of a car payment, or eliminating your child’s preschool tuition is a big decision that requires major life changes. Chances are, you’ll adjust your fixed expenses over the long-term, not overnight.
• Decrease your variable expenses. Decreasing your variable expenses is the only real change you can make today. You can choose to say no to the iced mocha, skip the big birthday gift for Mom, or pass on that “thing” you think you really deserve. But let’s face it, that’s all the fun stuff. Knowing how hard it’ll be to cut these expenses, it’s important to remember that this change is temporary, and also to reward yourself as you make progress.
Debt in America
Frugal living refers to a growing movement of people who make it their mission to cut their costs so they can reach their financial goals as soon as possible. In an ironic shift from the consumerism of the 1980s and 1990s, people now brag about how much they save instead of how much they spend. You can find a never-ending supply of frugal living tips just by searching the Internet and online blogs.
Twelve Ideas for Increasing Income
While the opportunities to increase your income are really only limited by your creativity and motivation, here are the top ideas I’ve seen work for people over the years:
1. Volunteer to pick up extra shifts. Instead of sitting around the house wondering how to get out of debt, pick up an extra shift at work. Working one extra 8-hour shift every two weeks, at $10 per hour, would be $2,080 a year.
2. Ask for a raise. If you’ve been the model employee, now is definitely the right time to ask for a raise. Try phrasing it to your boss in the form of a question like, “What are the important things for me to do to get a raise as soon as possible?”
3. Get a second job. There’s all kinds of stuff you can do on the weekends or at night for some extra dough. Consider getting a job at a place you already shop since many employers offer discounts to their employees. If you have days off during the week, consider getting a job as a substitute teacher.
4. Pick up seasonal work. Many businesses need extra help at different times of the year and pay a great hourly wage because it’s hard to find quality help. Check with local tax preparers in the early part of the year, resorts during the summer, and the mall at Christmas.
5. Have a garage sale. It’s time to get rid of some of that stuff you charged on the credit card years ago. A good garage sale can easily put $500 to $1,000 in your pockets. For large and more unique items, try EBay or CraigsList.
6. Rent out a room. If you own a house or are renting an apartment by yourself, you might be able to seriously knock down your debt by renting out a room to someone else. An extra $300 to $500 per month goes a long way!
7. Start blogging. You can start an online diary of your own, with ads built right into them, or you can sign on to blog for someone else. Blogging for someone else can pay anywhere from $3 to $20 per post, especially if you have a unique perspective or skill.
8. Freelance. If you have certain job skills or talent, ranging from bookkeeping to website design, you can make significant money working from home. Go to Google and search for “freelance websites” where you can bid on projects people need completed.
9. Tutor. Were you that kid who always got 102% on the math tests? Do you love American History or Spanish verbs? There are a lot of kids who don’t, with parents who are happy to pay $20 per hour for good tutoring. You can tutor on the weekends at your local coffee shop. 
In the Red
Watch out for scams! If it sounds too good to be true, it probably is. Be wary of work-at-home and money-making scams. Be especially cautious of any home business or income opportunity that requires you to pay an upfront fee or make an investment. The best home businesses most often seem to be ones where someone uses an existing skill to meet a demand in their neighborhood or community.
10. Turn your hobby into a home business. When we were really poor, my wife learned how to make beaded jewelry at her preschool mom’s group. We started using her creations in place of store-bought gifts, and it wasn’t long before people were asking how to buy them. She works when she wants and makes an extra $2,000 to $3,000 per year.
11. Open a home day care. If you are already a stay-at-home parent, taking care of a few extra kids besides your own can bring in significant money. After a few required classes and a safety inspection, you can start providing day care for other children at $8 to $15 per hour, per child!
12. Recycle. For years, I was that parent scooping up all the cans and bottles after my kid’s baseball games and at my office. The $10 to $20 per week I’d earn on Saturday mornings helped me overcome the weird looks I’d get from my co-workers.
Twelve Ideas for Decreasing Fixed Expenses
Decreasing your fixed expenses can result in a huge jump in your discretionary income. Oftentimes, though, getting rid of or lowering a fixed expense can take a major lifestyle adjustment. But when you are battling to eliminate debt, the thousands of dollars you may save might well be worth it. Here are some ideas:
1. Ditch the ride. Over my years as a financial planner, I’ve seen few things that suck up as much discretionary income as a car payment. Add in the other costs such as gas, insurance, and maintenance, and you can easily spend $5,000 to $10,000 per year for the privilege of sitting in traffic. One to two years of riding the bus or subway, or even carpooling with your accountability partner (Chapter 5), may get you completely out of debt!
2. Put a smaller roof over your head. There are a lot of reasons why you may have needed a bigger house or apartment in the past. But since the kids moved out, the dog ran away, and you’ve sold a bunch of your stuff at a garage sale, you could make do with less space. A few hundred dollars less per month in rent will go a long way toward getting you out of debt.
3. Cancel your PMI. Mortgage insurance is required by most lenders when they loan you more than 80% of a home’s value. However, when your mortgage balance drops below 80% you are no longer required to pay PMI. Oftentimes, companies will continue to charge it until you ask them to stop. Canceling your PMI as soon as you’re eligible can save hundreds each month.
4. Cancel unused subscriptions/memberships. Whether it’s the gym or the newspaper, there are a lot of things that slowly nickel-and-dime us to death every month. A couple of canceled memberships or subscriptions could easily save $50 per month, or $600 per year!
5. Shop your insurance. If you haven’t updated your life, health, auto, or home insurance in the last few years, now may be a great time. Besides making sure you don’t have too much insurance, you may also find significant savings as you shop.
6. Go green. A few years ago, our son, who was in kindergarten, started giving us a hard time about all the energy we waste. To humor him, we started working really hard to shut off the lights when we walked out of a room, bought more energy-efficient appliances, and got rid of that second, inefficient fridge in the garage. Our monthly utility savings were $50 to $100 per month.
7. Get rid of cable. Cable TV, while a fun luxury, can easily cost $50 or more per month just for the basic service. When you add in digital cable, HDTV, and those digital video recorders, it can easily cost you $100 or more per month. That’s $1,200 per year. That’s a lot of debt you could pay off!
8. Get rid of a phone. In this day and age, it feels like a little bit of overkill to have a house phone and a cell phone. Consider getting rid of your house phone and using the $20 to $40 per month to pay off your debts.
9. Quit smoking. Don’t get me wrong, I enjoy the occasional fine cigar. But heavy smokers are costing themselves a ton of money. A pack a day will cost you over $1,000 per year, plus the increased insurance and out-of-pocket medical costs. It may help lower your stress, but so will being debt-free!
10. Use regular gas instead of premium. For most light drivers, the difference in quality will be negligible. Most car experts would also agree that it doesn’t make any difference in how long your engine lasts. Saving 20¢ per gallon, with one weekly fill-up, could easily save you $150 to $200 per year.
11. Send your kids to public school. Private school tuition can run anywhere from a couple hundred dollars per month, into the thousands. Consider putting all your kids in public school at a certain age, and using the thousands of dollars in savings to pay off debt and save for college.
12. Buy from the source. I have many friends, both in the city and suburban neighborhoods, who buy fresh produce straight from the farm. In fact, for $30 per month, one friend gets two huge baskets of fresh produce delivered straight to her door. It’s fresh, healthy, and about 50% less than buying from the local supermarket. Other companies do this for meat, poultry, and fish, offering similar savings. A good place to start is your local farmers’ market.
Twelve Ideas for Decreasing Variable Expenses
Variable expenses are simultaneously the easiest to cut and the hardest to control. If you fail to pay attention to your variable expenses, your debt-reduction plan will feel like it’s going nowhere. If you get creative, you’ll reach your goals faster than planned. Here are some ideas:
1. Use grocery coupons. No one decision may decrease your variable expenses like using grocery coupons. Consistent use may cut your monthly grocery expenses anywhere from 35% to 60%. In fact, my wife consistently purchases about $1,000 worth of groceries for about $400 each month. Be sure to check out websites like TheGroceryGame.com and CouponMom.com to maximize your savings.
2. Always use a 2-for-1 coupon. Whether you are going out to dinner or going to a theme park, don’t go anywhere without using a discount voucher or coupon. Order an Entertainment Discount Book (approximately $40) for your area at www.Entertainment.com.
3. Always go “off-peak.” While you should be trying to cut back on your expenses, you and your loved ones may still need that occasional escape. When that time comes, always try to go “there” when no one else can or wants to. Most bed and breakfast inns are 50% off if you go Monday through Thursday.
4. Set gift limits. A lot of people with credit card problems can trace it back to holidays, birthdays, and anniversaries. Consider setting an agreed-upon dollar limit with the people you’re exchanging gifts with. Consider giving gift cards or writing a letter to tell someone how much they truly matter to you.
5. Trim clothing costs. One person can easily spend over $1,000 per year on clothing. To help lower your costs, consider shopping at the end of the season when clothes are on sale. Also look around your local second-hand store—there are great bargains to be found, especially on kids’ clothing.
6. Download the song, not the album. One of the great blessings of the technological age is websites like iTunes. Instead of buying a $15 album just to get that one song, you can download the one you want for 99¢.
7. Make your own cup of coffee. Even if you made your own coffee half of the time, it might save $10 to $15 per week, or over $750 per year.
8. Take your lunch. Whether it is the “taco truck” or the factory cafeteria, eating out can easily cost $5 to $10 per day. Bringing a lunch just twice every week could save $500 to $1,000 per year.
9. Go camping for your next vacation. Two nights at a three-star hotel with a view of the parking lot … $198. Two nights beachfront in a tent listening to the waves and the birds … $28. Getting your credit card paid off sooner than later … priceless.
10. Avoid dry cleaning. Getting five items dry-cleaned per week can easily cost you $10 or more per week, or over $500 per year. By wearing your washer-friendly items, as well as not buying new dry-clean-only garments, you can save a bundle!
11. Wash your own car. The full-service carwash can be a money trap. Between the carwash, the tip, and some snacks while you wait, you can easily spend $20 every couple of weeks. By washing it yourself, you’ll save $400 to $500 per year and get a free workout.
12. Donate goods instead of cash. If you feel called to give to charity, consider emptying out your house or closet instead of your wallet! You can still take a tax deduction, and use the cash to pay down your debts.
Set a Goal
Without even completing a budget, you probably have some idea where your expenses are getting you into trouble. While you don’t need to set a dollar amount yet, take a moment now to pull out your Debt Journal and make a top five list of the expenses you know you need to cut.
The Least You Need to Know
• Increasing your discretionary income is key to eliminating your debt.
• You can only increase your discretionary income by making more money or spending less.
• Increasing your income may allow you to cut fewer expenses.
• Cutting fixed expenses is a major decision, but yields big results.
• Variable expenses are the easiest to control, the least missed, and can be started today!
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