Manage cash flow to avoid debt
Many people get in a lot of trouble not because they don’t enough money to cover their expenses, but because they can’t manage their cash flow and finances appropriately.
Bills and payments often are not distributed evenly across the year as your monthly income. This simple fact means that you will need to manage your expenses in a way that allows you to make big payments without falling into a spiral of debt.
The good news is that many of the big payments, like rents or school tuition, are predictable. The bad news is that emergencies happen and can throw off your planning. So what can you do to make sure that your income goes a long way into covering your expenses? Here are a few tips to help you.
Categorise savings
It is easy to say that you would save some money every month to cover big payments, but you also need to categorise these savings. Do the simple math and save, for example, an X amount every month toward your rent and any other big payments. Once you name these savings, you are more likely to stick to your plan and less likely to dip into them for impulsive purchases.
Your categories should take into consideration any payment that doesn’t fit your monthly income, even if it just needs a couple of months to put together. If it is not an emergency, you should be able to plan for it.
Avoid credit
It might be easier to just put big payments on a credit card and pay them over time. The problem with this strategy is that you will be paying off the payment along with the interest, creating even a bigger bill. And this solution is also likely to get in the way of you saving for the next big bill. If you stretch your payment too long, you will end up accumulating credit card debt that is almost impossible to pay off.
Taking a personal loan creates a similar problem. The more credit you take to pay off your regular bills, the more apparent that you live beyond your means. Yes, bills must be paid, but if that is your case, you need to take a serious look into how to trim down expenses to fit your budget.
Plan for emergencies
A large medical bill, a car accident or any other emergency can hit at any time. If you have no savings cushion, you likely will have to resort to credit, which again puts you in a very vulnerable position. Having savings that can cover such emergencies is essential, and must be kept aside from your other savings.
In addition, have some contingency plan. To do so, ask a lot of “What if?” questions. This might sound dramatic or unrealistic, but it is an essential part of financial health. If you’re not sure what you’d if you lose your job, if you get sick or if you have a serious accident, your planning is lacking.
Make compromises
Savings are obviously the way to avoid credit and live within your means, which you can only achieve if you make some compromises. Although some of these decisions might not very popular, they are essential. In addition, the peace of mind you will get from knowing that you will be able to pay these late-year bills or next year’s school tuition is worthwhile.
Make compromises in advance also give you the option to pick and choose. You can discuss options with your spouse and family, and stick to a plan that takes into consideration everyone’s priorities. So instead of trying to tighten the belt after money has been spent and credit card debt is spiralling out of control, you stay in the clear with a good financial plan.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.