How to Manage Your Cash Flow
By: Melanie Dabb, Extension Assistant Professor
September 30, 2020
Are you wondering how much you should be saving? Or how much should you be putting towards paying off debt?
First, let’s talk about savings. How much do you need to have saved? One recommendation we hear a lot is 3-6 months of living expenses. This provides a cushion for a job loss or drop in income. It’s also a good idea to have money set aside for an unexpected event such as a car repair. Also, if you have a big financial goal, you will want to have a saving plan for that as well. You might well have more than one category of savings. Make sure as you are creating your savings plan that you decide exactly what the money is to be used for so that your impulse buys don’t become an “emergency.” Saving should be a priority because emergencies will happen and if you have no savings or not enough, you are more likely to use debt as a way to manage these situations which might undo the work you’ve put in paying down debt.
One of the things you might hear talked about is the bucket principle. Imaging a series of buckets hanging like stairs each one a little below the previous one. If you were to pour water into the first bucket, as it filled up it would spill over and fill the next bucket and on down until all your buckets are filled. Now let’s think of each of these buckets as a financial need. The top bucket is your essential expenses, things like keeping a roof over your head, food, access to medical care, reliable transportation etc. These are things that could really have a negative effect on you and your family if you were to lose them. Once your essential expenses are met, that bucket spills over into your savings plan. Once that bucket is filled it spills over into additional steps toward financial security which can include paying down debt.
The best part is, when it comes to paying down debt you don’t have to do all the work yourself! USU Extension has a program called PowerPay that will calculate for you the amount you save by using different strategies for paying down debt and you will be able to figure out which process will save you the most money. Visit this free resource at powerpay.org.
When you explore powerpay.org it will ask you to get all of your debts together, and put in the total balance, minimum monthly payment, interest rate and amount of time until the debts are paid off. Then it will perform all the calculations and help you make your plan. Here are some of the strategies that you will be able to look at in PowerPay:
- Pay off high interest rate debt first. When you have debts with high interest rates, more of your monthly payment goes towards finance charges instead of paying down the balance, so by paying these off first, you free up cash for other debts.
- Pay down debts with the smallest balances first. By getting these smaller balances out of the way you can then focus on larger debts.
- Making power payments. This is where, once you’ve paid off one debt, you take the money you were paying and add it to your payment on the next debt. Then when that debt is paid in full, you take that amount and add it to your monthly payment on the next debt and so on until all your debts are paid in full.
One last tip to managing your cash flow is to stay flexible. Things happen and sometimes our plans need a little adjustment. It’s important to roll with these changes. Don’t get discouraged and don’t give up.
Susan E. Hooper, “Start an emergency fund before disaster strikes” (2020). Retrieved from: https://extension.umn.edu/how-prepare/start-emergency-fund-disaster-strikes#sources-476810
Ann Henderson, “The Bucket Theory of Financial Management” (1990). Retrieved from: https://www.academia.edu/29026169/The_Bucket_Theory_of_Financial_Management
Barbara R. Rowe, “Reducing Credit Card Debt” (2019). Retrieved from: https://powerpay.org/education/debt/card_debt.php