Your Cash Flow and Disposable Income

Q.1. What is meant by “cash flow”?

Cash flow refers to the movement of cash into and out of an account. This helps you to determine whether or not you have sufficient cash on hand to handle emergency situations and it allows for future planning.

Q.2. Why is monitoring my cash flow important?

You need to monitor your cash flow to be sure that you have enough money to handle an emergency situation without having to borrow money to do it. In this way you can avoid increased costs associated with borrowing money which would result in you having less available income. The only way you can increase your current cash flow is to either increase your income or decrease your expenditures.

Q.3. What is disposable income?

Disposable income technically refers to the amount of money a household has available for spending and saving after income taxes have been paid. Many individuals use the term to refer to the money they have left to spend or save once all their bills and commitments have been paid.

Q.4. What are some things I could do to reduce my costs and therefore increase my disposable income?

The most important thing is to know the difference between needs and wants and to direct your spending accordingly. You need to spend wisely in order to save. There are some strategies that you can employ to do that. Examine what is draining your money and making it difficult to save. For example, avoid spending too much time in situations with friends or colleagues where spending money is going to be central. Being frugal, organized and living simply are good things which go hand in hand with saving money. 

Q.5. What are some basic things I can do to reduce expenditures?

You can trim spending by cutting back on cable and cell phone plans and cancelling any unnecessary memberships. You can also raise your deductible on your insurance plans and reduce costs but you will need to have an emergency fund available to cover any unforeseen events. You can shop smarter, using coupons and using the internet for comparison shopping.

Q.6. How can reward points and customer loyalty plans help?

Many businesses and services offer incentives to their clients. These can result in discounts and either free services or reduced costs. Be certain that you are, however, not indirectly paying for these “freebies” by paying higher prices initially or paying to be a member and not getting sufficient rewards to more than cover these costs.

Q.7. How do I know if I am headed in the right direction?

Calculate your net worth by subtracting your liabilities from your assets. If your net worth is positive you are headed in the right direction. If not, you have some serious work to do.