Cash Flow Projections

I have been surfing the web and reading how to prepare cash flow projections. There are lottsa good articles available on this topic. Made me think perhaps regular people couldn't learn a few things from this line of study.

Basically a cash flow projection takes your expected inflow and compared it with your expected outflow of cash each month. As an individual you can just take a calender and first write down when your bills are due, not the due date, but what day you have to send them to your creditor. Maybe you could do that on a calender with a red pen.

Then take a black pen and fill in your paydays for the month. Then we can do a little math and find the projected cash balance (could be positive or negative) for each day in the month...lets use a green pen to write that number on the calender.

This gives you your own cash flow projection for the month. Yes, it's just that simple!

So what does it mean?

Well if you have any negative numbers in green ink then you need to have that amount or even a little more in your savings account to transfer over to your checking on those days. If you have a negative balance at then end of several pay cycles then you are living above your means and you need to reduce your spending.

Likewise, if you have additional money piling up in your checking account then you should be moving it into a savings vehicle like a short term CD or a money market fund. You should work on saving at least 3 month's expenses (Suze Orman says 8 months worth of expenses for your emergency savings account, but you have to find your own comfort level for emergency savings. I'm almost to 6 months of expenses now and I think for me that's comfortable)

Once you master this, and you are consistently reducing your spending and moving money into your savings, you may be ready to move on to using credit cards to pay all your expenses.

Instead of paying out your cash when ever a bill comes due you pay with your card, then pay your bill every month. You can get a current card balance online or by calling the phone number on your card. IF you are careful and pay on time every month then you will quickly build your credit and your score will go up which means you can then find better and cheaper cards without fees and lower interest rates...not that you needs them! By paying your card off every month you should not be charged any interest.

The bonus to paying all your bills with the card is the book keeping. You no longer have to track your spending on your own the card company does it for you. You have your entire payment history on each bill every month. You can take that budget data and tweak it to find new ways to save!

You can do this by using credit to smooth your payments out over the month. Just remember it's a tool and not a crutch.

With this method you build your credit limits, you also build your cash cushion, so if you were laid off from work you could reduce your payments on your card, spend some of your savings to supplement unemployment compensation and weather the storm without ruining your credit or emptying your savings.

You get the best of both worlds. I know there are plenty of financial experts that say to cut up your credit cards, or hide them and never use them, I know this is a different way of doing things. But, what I an suggesting forces you to be responsible with your credit. If you can't stick to a budget then this may not be for you. If you know you can do it, then this really is the best solution for people who are sick of fighting with money.

Moderation in all things. Understand what you are doing, and why you are doing it. That is the road to financial strength.

So what have we covered?

In this article you have learned how to make a cash projection, how to match income with outflow of cash, and how to smooth out your cash flow using credit responsibly. You now know as much as many (so called) finance experts. Use this knowledge wisely and reap the rewards of financial stability.