Yes, your income matters. How much you make has a lot to do with how well you manage each month, and what you have left over. Income isn’t everything, though. In fact, you might need to worry more about your cash flow than your income, especially if you’re a freelancer or work in another profession that features a variable income.
Cash Flow and Timing
Cash flow includes an element of timing. It’s not just about how much money you have coming in and where it’s going. You also need to consider when the money will be available, and when you will pay various expenses. Your cash flow plan should include information about the timing of your income, and when you expect to pay your bills.
Timing matters because often you need to have the money available for payments. If your mortgage payment is due on the first day of the month, you can run into serious trouble if you don’t receive payment for a project until the fifth day of the month. Missing your payment could put a black mark on your credit report and if the bank has to return your payment, you could face steep fees. Almost anyone with a variable income has a story to tell about missing a payment or running out of money in the checking account due to a cash flow timing issue.
Understanding when you are likely to be paid, and accounting for these expectations can be more important than the actual amount you are paid. It doesn’t do you much good to know that clients owe you $2,000 if you don’t know if it will arrive before it’s time to make a car payment and buy groceries.
Working with Your Cash Flow Realities
Get a feel for your cash flow, and the realities of your situation. In some cases, you can arrange to make mortgage payments on a different day of the month, such as the tenth or the fifteenth. Many credit card issuers and other lenders will let you adjust your due date. Automatic contributions to retirement and other investment accounts should be scheduled for when you know you are likely to have money in your account.
Try staggering your bill payments and automatic withdrawals so that it’s not all coming out of your account at one time. If you know that you are likely to get $500 here and $1,000 there, you can manage your costs by spreading out due dates so that they aren’t clustered together, requiring a lump sum that you might not have ready access to.
You can also smooth your cash flow issues with the help of credit lines. Connecting a line of credit to your checking account or pairing your checking account with a savings account can help you pull money into your checking account, just in case your income is delayed.
Another strategy is to use credit cards for most of your expenses to keep your checking account from being overdrawn. When you do receive payment, you can pay off the credit cards. This approach requires discipline and planning so you don’t go overboard. However, it can be a good way to avoid the cash flow crunch in your checking account — all while possibly building rewards points and getting cash back.
You can’t always predict how fast a client will pay your invoice. However, you can manage your cash flow in a way that makes the most of your money and helps you avoid small disasters.