Cash Flow Continued

The other day we talked about how to determine your cash flow. What happens if you get to the end of the exercise and your expenses are greater than your income? Or, maybe they're just closer than you need to achieve your goals.

As we discussed, some expenses are necessary or fixed while others are optional or variable.

Analyze your optional expenses first. The first time I did this exercise we were eating out a lot, had two car payments, and were paying for cable TV. We were really struggling to make ends meet at the time. Many months we'd end with $20 to $50 left in our checking account. Our savings account was minimal. I didn't realize how much optional spending we did.

We chose to focus on a couple areas of spending.

Kerri and I both worked at the time and were eating out every day for lunch. We immediately switched to eating out once per week each. We saw savings of nearly $200 just by making this one switch. (NOTE TO SELF: You've fallen off this bandwagon over the last few years and could cut spending and calories.)

Vehicles certainly weren't optional for us. We both commuted 10-25 miles to work. Our vehicles weren't fancy and were roughly in line with our needs. We still felt there was some element of optional in our vehicles. We considered several options.

1. Sell vehicles and buy something for cash or lower payments.
2. Use $200 saved from not eating out to accelerate payoff.
3. Use wind falls to accelerate payoff.
4. Continue with the same payment schedule.

We ultimately chose to go with a combination of 1-3. We sold our car and bought a slightly older car. As a way to reduce expense further we were able to get a lifetime warranty on parts because we bought it from a salvage yard that rebuilt cars. We greatly improved our cash flow and saved ourselves significantly in terms of vehicle depreciation. Finally, a small kicker to our cash flow was the "new" car had a lower insurance premium.

After we swapped the first vehicle we decided to keep our truck and accelerate payoff. We added the payment from the old car plus started applying any bonus or overtime income to pay it off. Two short years later we had improved our cash flow and were applying both payments to Kerri's student loans.

Cutting all optional expenses wasn't our preference and isn't what I'm advocating. We decided to keep cable, although we went to a cheaper package. We also could have saved money by selling the truck. Eventually, we got serious enough about getting out of debt to sell the truck in exchange for a very utilitarian truck.

Not everyone will have such obvious optional expenses. Some of you might even have necessary expenses that match or exceed your income. Here are some questions you could ask yourself to identify opportunities to reduce fixed expenses.

1. Am I spending money on something I could get for free? I have a penchant for buying books. The library has been a great replacement.
2. Are our necessary expenses really necessary? An example is your home. A home is necessary. A 3000 sq ft five bedroom house might not be.
3. Could we sell something to payoff a loan? eBay, Craig's list, and other local sites have made selling things much easier. Paying off a monthly loan to minimize future cash outflows is a great way to help in the long-term.

What are your big optional expenses? How far have you gone to reduce expenses? In the near future we'll talk about the other side of cash flow--income.

Have a great weekend.

Josh