It’s never too late to get your personal cash flow sorted out. Get your cash flow right, and you can save and build financial security and even wealth. Fortunately, the steps to be followed are fairly simple.
The five steps towards achieving a sound cash flow:
1. Developing a budget
Before a budget can be set up, you need to know what your expenses are:
- Determine your regular expenses. You should include:
- Payments for water, electricity and municipal rates
- Monthly expenses on debit orders for insurance, car payments and instalment purchases
- All your accounts and how much you spend on them per month
- Your credit card(s) – whether you are paying the minimum required every month, or making larger payments to reduce this debt
- Daily ‘out-of-pocket’ payments, such as taxi fares or takeaway coffees.
- Next, identify where money is spent needlessly. You could find:
- You spend too much on your credit card(s) and a good portion of what you have to pay is on interest charges
- You are buying ‘luxuries’ like take-away food, clothing or shoes. Once you’ve identified this habit, the gains can be huge; spending just R20 a day means you are spending R7 300 a year on things you probably can’t remember. That money could be used to reduce other debt or start saving.
- Drawing up a new budget:
- After identifying where savings can be made, draw up a revised budget. This process will see your cash flow improving.
2. Cutting back on accounts
The more accounts you have, the more likely it is that you will use them. Begin correcting your cash flow by:
- Paying off and closing accounts. This means that instead of buying on impulse and credit, you’ll begin buying what you ‘need’ – not what you ‘want’
- Not opening new instalment accounts. A new TV, for example, might make your friends envious, but the payments could push you over the edge. For instance, a TV advertised at R3 799 would cost R187 a month – not bad. But look again: with 36 payments at 21% interest, the total cost would be R6 701. So, that TV could cost you R2 902 above the sticker price.
3. Setting up a workable repayment plan
Once you have worked out what you owe every month and listed expenses, getting cash flow right means:
- Paying off the most expensive debt first. Using the TV set example (above) means that the quicker you pay off the TV set, the more money you will save, as money spent on interest is reduced
- Maintaining payments on all your debts – even if you pay the minimum required.
Following this process can shrink your debt fairly quickly. The secret lies in never reducing what you pay out every month, but using it to repay outstanding debt: for example; if you have to pay off R10 000 a month to settle accounts and have reached the point where you have paid off an account worth R 2 000, you’re winning the cash flow battle. Instead of taking that R2 000 for other uses, simply take that money, which you are already used to paying out, and reallocate it into paying off another large debt or spreading it across your other payments.
4. Consolidating all your payments into a single loan
If you have taken positive steps, including closing accounts and reducing spending, you could consolidate all your debt into a single loan and use the cash paid out to pay off all your loans. You then have just a single payment to make every month.
If the interest rate is low, you will win by saving on interest payments.
5. Pay yourself first every month
Once your plans are working and your cash flow is looking better, it’s time to start paying yourself first. Open a savings account and transfer money to your savings before you spend on other things. Don’t compromise and you will soon see your positive cash flow turning into real savings and a better lifestyle.