Money flows through your life but sometimes it does not flow anymore. There come months when expenditures are high and income decides to rest. If you have never done investments, it seems to be too complex, however, it is not – it is just math. That means that you should calculate when the money flow stops and how long it will last.
Let us say that the cash flow is like the gasoline in your car. You know that you are not able to drive from New York to Los Angeles without refilling the tank. The same way you will not be able to pay rent in July if your clients decide to pay you in September. It is not the question of being smart on the stock market. It is about being aware that you will find yourself in the middle of the desert without any fuel.
The first thing you should do is analyze your history to find out the pattern. For example, if you sell Christmas sweaters, you earn in December and starve on instant noodles in February. This is the seasonal cash flow gap, which happens to everyone – from landscapers to accountants. The second step is to mark such quiet periods in your calendar.
The idea is to create a buffer for the upcoming storm. Allocate a certain part of the payments you receive during the period of prosperity to this purpose. Do not touch these funds even if you want to buy a pair of shoes or go for a great dinner. This means that you build your own bank from which you may take a loan in the future.
High yield savings accounts such as those offered by Ally or Marcus are great to save these funds. This kind of bank pays you additional interest, which is more beneficial than keeping your money on the checking account, which earns nothing. Besides, it is always liquid meaning that you may take it instantly in case of some expenses.
It is better to use them for paying the bills in the slow season, rather than taking the loan. Using the debt is like getting into the trap because it turns the seasonal gap into the problem, which will bother you throughout the whole year. You should enter the slow season calmly, without any worries.
If your gap is bigger than the money you save, you should consider getting a small line of credit. However, it should be used only as a protective measure, not for pleasure. It is for catching you when you trip, not for creating a trampoline. Moreover, you should know the amount of the money you will need before taking the loan.
Cash flow planning is like adulting with a spreadsheet. It is not about predicting the behavior of the stock market and its tendencies or selecting the profitable projects. It is about knowing the period when you will have money problems and being ready for them. Once you learn to do it, you will have a sweet sleep every night.