Financial Fundamentals (Pt 2) - Cash Flow
Welcome back! With a few weeks of tracking spending and earnings, hopefully you have a pretty good idea of what your monthly income is, as well as what your monthly spending is. If you still have money left over after you pay your fixed costs, service any debts, and save for the future, that’s great news! You have a little splurge money, or you can pay down your debt faster, or save more. Depending on what your goals are, you may want to focus on one or combine a little of all three - but the point is you have options with how to spend the excess.
What if there is no excess and instead that number is a negative? Well, first of all let’s still take a moment and celebrate the small victory of identifying the problem - once we know there is a problem we can work to fix it so we’ve taken the first step. But knowledge without action doesn’t get us very far so let’s look at how we can work to bring ourselves cash flow positive. There are really only two ways to bring ourselves back into budget: earn more, or spend less. Let’s start with increasing the dollars in.
Earn More
If it was that easy, we would all be doing it - I know. However there are some things that are worth mentioning to see about maximizing earnings.
If you’re struggling due to a short term item (an unexpected emergency expense for example):
Pick up additional hours at your job if you are paid hourly or overtime is tracked (don’t worry about more hours leading to being “paid less”, we’ll talk about marginal tax rates in a future post).
Get a second job or side hustle, either working part-time or monetizing a hobby of yours (coming soon: discussion about payroll deductions, what you can and can’t avoid, and planning for the tax man if you monetize a side business).
Channel your inner Marie Kondo and declutter your home, selling anything of value that you don’t need (coming soon: when do you need to claim personal items sales on your taxes).
Please note, none of these are long term fixes, if you are cash flow negative every month this will not get you back to positive in the long term unless you actually like working all the time.
If you consistently earn less than you spend in a month:
Ask for a raise (most people will know whether this is a reasonable request at their current job). Unfortunately, many people, particularly women, hesitate to ask for more - even when they deserve it.
Explore changing companies. We as a species hate change, so unless we dislike the job we have, we are not all that likely to look to change our occupation. However, it can literally pay you to do just that. According to an ADP workplace vitality report, on average individuals who change jobs increase their earnings by 5.3% annually, whereas those that don’t will see increases no higher than 4% (and anecdotally, an annual increase of 4% seems fairly high with most employers). In a future article we will be discussing total compensation relative to salary levels and how to make sure you are maximizing your benefits.
Change careers. This is the dive into the deep end of the pool. If your company or industry is in a temporary slump (and lots are right now), this is probably not the first option to go to. But if you are in a declining industry, or there is just no path to earning what you need to survive, it may be worth looking at making a fundamental change. This may have some costs associated with it to re-train or get additional education, so try to reach out to people in the industry to get an idea of the clearest path to make your new career viable, the opportunities for growth, and determine if a fundamental change is right for you. Maybe baking is your passion, but if it’s not paying your bills you may be better off changing lanes and being known as the friend with all the best snacks.
Lastly, check your provincial and federal government websites to see if you qualify for any tax credits or benefit programs. While it may not put cash in your jeans immediately, these programs can help reduce your taxes payable to free up money for everything else - and who doesn’t like paying less in taxes where you can?
Spend Less
While we would all like to earn more - for most of us, moving to cash flow positive is going to involve having to spend less as well. Now, let’s be clear this is not a “if you didn’t eat avocado toast you wouldn’t have any debt you silly millennial” kind of post - but most of us have some areas we can cut back on.
Look at your monthly expenses and list them from most necessary (mortgage/rent, groceries) to least necessary (again, will be different for each, but thinking nail appointments every 3 weeks or a gaming system). Start with the least necessary - which items can you eliminate entirely? Often we get used to having something and can’t imagine living without it, but the same is true the other way and we can adapt without something and start to wonder why it was so important. For example, a lot of folks have started to cut the cable cord, but if you’ve also accumulated a Netflix ($275.88 annually for a premium account), Amazon Prime ($99 if paid annually), Disney+($156 annually), Crave ($264 annually), Apple TV ($155.88 annually), etc. etc. accounts you may be paying just as much as you were before, but you actually use them? It may be worthwhile to review your viewing habits and cut back to 2 or 3 streaming sites and put aside the difference - or rotate through services through the year and only keep one or two at any given time.
Another thing that may have snuck into your expenses are expired free trials - when taking advantage of a free trial offer make sure you put a note in your calendar a few days before it ends so you can cancel it before your credit card is charged, and make sure any that were missed are cancelled in your first expense culling.
Now that we’ve eliminated some items totally, let’s look at the ones we don’t want to cut entirely, but aren’t that necessary. Things like cutting back on eating out or fancy coffees, or evenings out. It is easy to conflate spending time with friends (grabbing drinks or lunch) with spending money. Limit going out with friends to happy hours, or have friends over for a pot-luck, or arrange a hike. If 2020/2021 taught us anything, it’s the time spent connecting with people that means more, not going to the cool new gastropub.
Shop your needed ongoing expenses. When was the last time you reviewed your internet / cell phone package - can you get a better deal elsewhere? Is your mortgage coming up for a renewal? Shop around for a better interest rate. Review your homeowner’s and auto insurance. These things are all
tedious and generally not fun to deal with, but letting them slide can turn into paying too much money month over month. If you can bring your cell phone bill from $110 to $80, your car insurance from $200 to $150, and a mortgage from $2,100 to $2,000 per month that’s $2,160 saved annually..
If your earning / spending gap is more extreme, you may want to look at more long term options - if a good chunk of your monthly expenses are on housing can you get a roommate to reduce your housing costs? Maybe it’s worthwhile to move closer to your work (or to a transit hub) so you can sell your car and alleviate those expenses? While these may be extreme, if you need to make a significant change in your budget, an extreme measure may be necessary.
Is this a Need or a Want?
While there are some items that are universally considered needs and some that everyone agrees are not necessary, for the most part this line is blurred. In extreme cases, some will say internet is not a necessity, because libraries provide internet access for free to members, and membership is free. However, if you don’t have internet how are you able to sell your items, look for a new job, etc?
In addition, cutting expenses down to the bare bone and not allowing any wiggle room for a movie or an evening out is not exactly a recipe for compliance, and if you do strictly adhere to your budget you’re probably feeling pretty drained. The line between enjoying life and getting your finances on track won’t be exactly the same for everyone, but you do need to account for not resenting your plan as you work through it.
Ultimately, you and your family will need to determine which items are necessary and cannot be changed, which are necessary but can be reduced / shopped around to reduce cost, wants that you are willing to give up temporarily (until debts are cleared or other expenses can be eliminated), and which are things that can be given up for good. Take an honest look at your monthly expenses and classify in those four buckets to reach a spending plan that will help move you in the right direction, but that you can live with as well - a plan that you don’t stick with may as well not exist at all.
Getting Help - When the Situation is Serious.
So if you’ve read through all of this and are still stressed, it may be time to move past budgeting and get some real focused help.
If you are tracking your spending, you know what is a need and what is a want and still find yourself spending too much on impulse, it may be linked to a larger issue. Do your benefits cover psychologists/counselling or do you have an Employee and Family Assistance Program? If your spending is a compulsion, you may want to talk to someone to determine how to reduce the impact it is having and hopefully find and address the root cause.
If the issue is that a large portion of your monthly expenses is tied up in debt servicing - the next installment is going to look at debt repayments in more detail, including reducing interest expenses, consolidating your debt, credit counselling services, and when to consider a consumer proposal or declaring bankruptcy.
Elyce Harris is a CFA Charterholder working with Cornerstone Investment Counsel, a registered ICPM in Alberta, Canada. She is also a licensed insurance broker in Alberta, Ontario, and PEI. While every effort is made to ensure the accuracy of statements, errors may occur. If a specific stat or carrier policy is cited, a source will be provided, however this is not done for generalizations.