I think about cash flow. A lot. As a freelance writer married to an adjunct professor, my household income is sometimes a little unpredictable. In many cases, it’s not about how much we have coming in; it’s more about when the money arrives and leaves.
As I contemplate the coming summer, and the dwindling of my husband’s paycheck, cash flow becomes even more important. He’s teaching a couple of classes this summer, but the pay for them is somewhat unpredictable. It’s not the same as when he teaches classes during the “regular” school year and is paid on a set schedule.
So, I know that we’ll have the income, and that it will be more than enough to take care of our spending priorities. However, I also know that I don’t know exactly when the money will arrive (we have yet to figure out the summer payment schedule for adjuncts at this particular university). And that can make a difference.
Timing Matters in Finances
When planning your spending for the month, it’s important to consider the timing surrounding your income and expenses. I like to use my bi-weekly mortgage payments as an example of this. My mortgage payment is going to come out every other Friday, no matter what, because it’s on an automatic payment plan.
However, I might have a client who pays late, so the money may not actually arrive until the following Monday or Tuesday. The mortgage payment comes out, and I have the income necessary to cover it, but because of the timing of a client’s payment, there isn’t quite enough money in the account. Money is taken from my connected personal line of credit, and I am charged a $5 fee, plus interest until the small loan is repaid.
If I didn’t have that line of credit connected to my checking account, though, the consequences would be different. The mortgage payment would still go through, but the fee would be $39 for an overdraft.
In either case, though, it’s clear that my problem isn’t income, in the sense that I don’t have the income to cover what I spend. My problem has more to do with timing — it’s a cash flow issue.
Notice the Way Money Moves through Your Personal Economy
In order to avoid cash flow problems, it’s important to pay attention to how money is moving through your household’s financial system. If you have a regular paycheck, and you can predict most of your expenses, this is fairly simple. You can have retirement account contributions made from your paycheck so you don’t have to worry about it. You can schedule your mortgage payment to be taken out of your account two or three days after your regular direct deposits.
With an irregular income, though, things become a little trickier. You might not know exactly when you will receive your expected income. I’m still waiting for payment on an invoice sent five weeks ago. I can send reminders, but I can’t force my client to pay me right this instant.
In cases where you have a less predictable cash flow, it makes sense to take precautions. Some of my automatically paid bills, like the satellite TV bill and the produce delivery, are charged to the credit card each month. That way, I can just pay what owe when the credit card statement comes, and I don’t have to worry about those bills eating into my checking account at an inconvenient time.
My other stopgap is the personal line of credit. It’s not something that is needed very often, since I like to have a bit of a cushion with my checking account. However, it has come in handy in some instances. Its cost is much lower than the standard overdraft protection, which can add up fast, and cost quite a bit.
The reason for having these measures is to prevent me from having to constantly fiddle with some of my automatic transfers to my emergency fund, retirement account, and quarterly estimated tax fund. It also ensures that my money continues to move smoothly, and I am still able to go to the store and buy groceries, even if there is a bit of hiccup with timing.
Most of the time, my planning works out well, and there are no problems; it’s usually very smooth. But sometimes, circumstances result in an unexpected situation. At those times, it’s good to have a backup plan based on your understanding of your household’s cash flow.