I’ve shown you how to take control of your personal cashflow by utilizing credit.
And how to spot trends in your spending and reduce unnecessary expenses by using Mint.com (and my variable/fixed expense spreadsheet).
And how to optimize your paycheck for taxes and retirement, while making sure expenses are in line with your take home pay (also with the help of my spreadsheets if you find them helpful).
Now we’ll transition into managing your entire financial world with more vision and clarity than you’ll find from any other budgeting system.
Taking Advantage of Cash Discounts
Smart business owners never shy away from opportunities to reduce costs (or reap rewards) by expediting their bill payments — or by paying their entire balance up front (lump-sum). Why? Because it’s free money.
It’s known as a cash discount, or sales discount. And vendors offer it because the quicker they can get paid — in full — the more quickly they can improve their own cashflow situation.
When I worked for an advertising agency, we managed large volumes of circular printing for grocery clients. Our print vendors were saddled with huge fixed expenses like paper, ink, and presses.
And most printers would offer discounts of 3-5% on their invoices if we paid within 10 days of receipt. A few percent may not seem like a lot, but it adds up, especially when the invoices were for hundreds of thousands of dollars.
One of the many benefits of using credit cards is they empowered me to make large lump sum payments — without directly impacting my checking balance.
For example, my car insurance; most auto insurers incentivize customers to pay their policies up-front (or biannually) by offering discounts on their rates.
Why? Because the sooner they get your money, the sooner they can invest and earn interest.
And it can add up in your personal cash flow as well. I save hundreds of dollars per year simply because I pre-pay all of my car insurance.
In personal finance, cash discounts can be found in a variety of places:
- Savings from never paying ATM or bank fees
- Earning interest on your checking and savings accounts
- Savings from avoiding interest payments on debt
- Maximizing rewards from credit cards
- Discounts earned by paying some expenses up-front, like insurance, or the interest you would save by paying off your car loan or mortgage
In 2018 my net earnings and savings were over $5,000 from these forms of cash discounts. Most of it from credit card rewards.
On the flip side, during my twenties (when I was grossly negligent with my personal finances) I estimate I wasted over $100,000 in cash discount opportunities.
I was never able to take advantage of cash discounts until I mastered the use of credit, and until I developed a more intuitive budgeting system allowing me to visualize the future.
How to See into the Future
Have you ever used one of those calendars, the ones that allow you to see three months at a time?
That’s the idea behind my Quarterly Cash Flow Planning spreadsheet.
When I was in debt, and stuck with traditional budgeting tools, nothing provided me with the vision I needed to manage my irregular income and plan for future expenses.
I wasn’t able to grasp the bigger picture of how money was flowing in and out of my accounts because traditional budgeting only focused on a given month.
I wanted to see in the future.
And not even Mint.com had an answer for me. So, I made up my own spreadsheet allowing me to plot all of my income and expenses over a longer time horizon.
It gave me the ability to adjust how and when I paid bills so I could take advantage of cash discount opportunities, and always be sure I was maximizing savings.
For example, I’m going on vacation in May and can see and prepare for that expense in March.
Or, my car insurance payment is due in August and by June I’m figuring out a way to pay it off in one lump sum and maximize my discount.
How It Works
In the chart below is a typical month with two pay periods, one at the beginning of the month, and one in the middle of the month. And I align payments to vendors based on my paydays, not based on their due dates.
For example, my mortgage is always paid at the beginning of the month. My credit cards are always paid in the middle of the month. Those are my two largest expenses, so I make sure they don’t both fall in one pay period.
The categories highlighted in yellow are those I have to pay in cash. Some vendors don’t accept credit card payments without assessing some type of fee. So rather than incur a fee (which is opposite of good cash flow management) I pay those vendors in cash.
The categories in white I pay with credit. As you can see, as we move down the chart, the credit card categories don’t impact my checking balance, only the cash categories do.
The credit card category is simply the previous months credit card spending. And this is the point; I use the credit card companies’ cash to run my personal financial business and pay them back at the end of the month.
And this gives me more buying power, allows me to earn interest on my idle stash of cash, earn rewards and/or points, and greatly simplify my life.
I can also take advantage of cash discounts and gain visual insight into how and when I need to pay off those larger bills.
POSITIVE CASH FLOW
Positive Cash flow (in business terms) is the net amount of money being transferred in and out of a business. A company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, meaning after they pay all of their bills each month, they have money left over to save or reinvest. Your ability to build savings and wealth is determined by the same principle.
Now, you can actually see this occurring in your own personal finances.
And over time, if you see gradual surge in your checking account balance, then you are achieving positive cash flow.
If you encounter negative numbers (like above) you’ll have time to figure out how to get back into positive territory.
For example, if I have a large unexpected expense — like a car repair — and I wasn’t planning on it — I can reduce my spending in other categories. This spreadsheet affords me the opportunity to move things around.
If things really go off the rails, meaning I need a cash infusion, I’ll know exactly when it’s needed before I’m overdrawn.
In my next post, I’ll focus on how to maximize credit cards rewards by utilizing something I call: Credit Card Floating.