Thriving Millionaires

By Eric

Sometimes you may find yourself in a situation where additional cash flow in a given month would significantly improve your financial well-being. Perhaps it helps you avoid tapping into your emergency fund, or helps you avoid using your credit cards without the ability to pay it off the following month. No matter the reason, timing can sometimes mess with your financial life. There are, however, ways to build levers for on-demand cash flow into your financial plan that you can pull when the need arises – whether a one-time event, or a likely on-going budget shortfall.

While these “tricks” don’t fundamentally change the amount of money we’ll bring in each month nor will they change the amounts of our bills, they will act as levers I can pull to increase our cash flow as needed.

It’s also worth noting that not all of these will work for everyone. You’ll need to be in a position to execute them on the front end (and be able to continue executing them) until you need to pull the levers – but if you can do so, you’ll have a few options when you need to increase your cash flow – either on-going or just a few months per year.

1. Making Additional Payments to Mortgage Principle: Each month that I pay our mortgage, I send additional money to be applied against the principle balance on our home mortgage. This certainly acts as a way to reduce the balance of our debt and save on interest in the long-run, but it also acts as a lever I can pull to increase our available cash each month. Right now, I pay ~$700 per month extra on our mortgage payment. I do so for two main reasons: 1. It allows us to pay off our 30 year mortgage in about 17 years which saves nearly $90,000 in interest over the life of the loan but also because 2. It allows me to, in any given month, reduce our expenditures by $700, thus increasing our cash flow by up to $700 when needed. The trick is to plan to make these additional payments each month and build them into your budget – don’t think of the additional payment as optional, but rather think of your mortgage payment as the amount plus your additional payment to principle each month.
2. Over-Contributing to Our 401k / 403b: I aim to contribute about 10% of each paycheck to my 401k. I believe that this acts as a reasonable savings rate and allows me to reduce my tax liability each year by putting most of the money in pre-tax. However, right now, I am contributing somewhere in the neighborhood of 12-15% of each paycheck to my 401k. Knowing that 10% is my target rate, I have the ability to pull the lever and give myself a 2-5% “raise” in take-home pay at any given time. It’s worth noting that this approach may take 2-3 pay cycles to implement depending on how quickly your 401k administrator can change the contribution amount with your employer’s HR department.
3. Ear-Marking Money to Invest Each Month: Outside of my 401k, I budget about $500 each month to invest post-tax through a brokerage account. There is benefit to saving money both pre-tax as well as post-tax for retirement (a topic we will discuss in a later post), but the benefit to saving for retirement outside of a 401k with respect to cash flow is that I can, at any given time, not invest that money and immediately have an additional $500 per month in cash flow. This differs from the 401k approach above, because, as stated, many 401k plans take 2-3 pay cycles to adjust your contribution rate.
4. Having Bills that are Non-Contracted and Flexible: Many bills are non-negotiable. I know that each month, I have to pay our electric bill, our water bill and our HOA dues. Our cell phone, TV, and internet plans are contracted (I can’t just cancel our plan during a month to free up cash). However, we have a Netflix subscription, our gym membership has no contract and other bills that have no contract associated with them. This flexibility in the non-contracted bills allow me to pull some levers by canceling these plans (if needed) and free up between $10-$100 per month knowing that I can re-subscribe the following month without penalty. This approach wouldn’t be my first choice, but for some people, it may be the easiest way to free up cash flow – especially if you’re not in a position to have been making additional mortgage payments or reduce your 401k contribution.

While the four levers listed above are not an exhaustive list, my aim is to demonstrate areas in which you can increase your monthly cash flow as needed. The key is to build these items into your regular plan so that you can pull the levers when needed. The time to set these up is not when you realize your cash flow is tight, but rather when you are able to do it.

If all you can afford is an extra $50 per month towards your mortgage principle or an extra 1% into your 401k, start doing it now. You will learn to adjust your budget and lifestyle spending to accomodate the change. Once you are comfortable with the new amount – try to increase your contribution by an extra $50 or an additional 1% down the road. The more you can build these redundancies and safety nets into your regular budget, the more cash you can free up when needed by pulling one or more of these levers.

Patrick’s Thoughts:

The idea of on-demand cash-flow is an interesting one, especially when you think about household finances. Businesses often have different levers they can pull to slightly adjust their cash-flow, but it’s not something most families think about. I think a concept that we talk a lot about on this blog is being prepared for different financial uncertainties and how to prepare for them. What’d I’d love to talk about today is “what’s the purpose of having the ability to increase your on-demand cash flow?”

I want to preface everything by saying, I agree with many of the strategies Eric points out above. They are great techniques that can help you handle certain infrequent situations you find yourself in. On the other hand, if you were to tap into this every month, you would be cutting in to cash that was otherwise serving another financial strategy of yours (say – paying off your mortgage more than ten years early). While this isn’t necessarily a bad thing, I think it’s important to understand the implications behind the techniques Eric discusses above.

So what’s the purpose of being able to quickly generate additional cash flow? Why not just tap into your emergency fund? On the surface, both are designed to help you prepare for unexpected financial circumstances. The biggest difference between the two is that an emergency fund is for very large, unexpected financial needs. I think of the emergency fund as something that allows you to replace a broken furnace or fix a leaky roof. These types of things generally are expensive, and infrequent, so you need to have a significant chunk of cash on-hand so you don’t have to take on high-interest debt.

So generating additional cash flow should be used for smaller, unexpected purchases? Sure, that is one way to think about it. The problem is, depending on how you classify unexpected, you may be tapping into these sources on a monthly basis. There are many items that may fit the bill: vet visits, a vacation with your family, a small repair on your car, etc. The list can go on and on, and you may eventually find yourself in a place where you are consistently pulling back money you were using to pay down your mortgage early.

Again, this is not a bad thing, because you have prepared for this, but if you don’t want to be in this situation on a regular basis, it will be very important for you to plan. Ask yourself the question, “what are the instances where I will need to generate additional on-demand cash flow?” Be very clear about when you will do this and stick to it. For things that you can plan for, even if they are annual, fit those in your budget and adjust accordingly. You could also utilize different 0% credit options (for six months) from PayPal or others to pay for things like family trips or larger than normal vet bills, and only slightly adjust your budget to pay them off before you accrue interest.

With all of that being said, it never hurts to have the option to generate additional cash without having to change your income. This is a sound principle and will serve you will when things go south. I just really want to emphasize the importance of not falling back on these options too often. Then, they just become regular parts of your budget, and they should be treated as such.