243 | How to Increase Your Cash Flow This Year

Your cash flow is one of the most important aspects of your personal finances.

Too many lawyers have very little or even negative cash flow, and it’s keeping them living on the edge and not achieving their goals.

In this episode, let’s talk about why your cash flow is crucial to your financial progress, along with tips to increase your cash flow this year.

• • definition of cash flow
  • positive vs. negative cash flow
  • two ways to increase your cash flow
  • ways to increase your income
  • ways to decrease your expenses
  • using your values in your spending decisions
  • the effect of increasing your cash flow

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back to the show. I hope you’re doing well and having an amazing day so far. Today, we are talking about how to increase your cash flow this year. Your cash flow is the most important aspect of your personal finances, because it really impacts everything that you experience from day to day. It is why you feel like things are tight, or feel like you have a lot of money. It’s why you end up not having enough money. Come. Payday, where you’re waiting for that next paycheck to hit all of that is because of your cash flow. So, we’re going to talk. So first, what is cash flow? Your Cash Flow is the difference between your income and expenses. So if you have more income than you have expenses, then you’ve got a positive cash flow. When your income and your expenses are equal, then you’re living paycheck to paycheck. You’re kind of right there on the edge. And a lot of times that leads to rising debt balances, because you’ve got this much income, you’ve got the exact same amount of expenses. And so if some unexpected thing pops up that doesn’t usually happen in the month, there is no other money to cover it, so you end up putting it on a credit card or things like that. Now, if you have less income than you have expenses, then you have negative cash flow, and this also leads to rising debt balances. Typically, in this situation, people are supplementing their income with debt, so they’re going deeper and deeper into credit card debt. In the instance when you’ve got the same level of income and the same level of expenses, you’re not going into debt as quickly, because typically you’re just putting the unexpected thing on credit cards, versus when you’ve got less income than you have expenses, and you’re regularly using those credit card balances to keep up. Now we want your cash flow to be positive. And if you are working toward a certain goal, or things like that, like you’re trying to move forward with your finances, we want it to be as high as possible. So how do we increase your cash flow? As I said, your cash flow is the difference between your income and expenses. So we can either increase your income or we can decrease your expenses, or both. On the increasing income side, we want more money coming into your account so that could be getting a higher paying job. That could be getting a second job for a time like I’ve had clients who have taken on second jobs for a short period of time because they’re trying to achieve a certain goal. Typically, they’re trying to get out of debt, and they’re in that situation where their income and expenses are right there at the same level, or their income is maybe just barely higher. And so to give themselves a bigger push to be able to start paying off that debt, they’ll take on a second job. It could also be starting a side hustle or starting a business. So at the beginning of my money journey, I used to sell items from around our house and sell things that my son had outgrown and things like that, very simple. So side hustles can be a great way to bring in some extra income, and it doesn’t have to be something that’s super time intensive, like for me, selling the items around our house or selling things that my son had outgrown, I would put them up on these apps, like one was called offer up, and I would just take a picture of the item, and if someone wanted to buy it, I brought it with me to work, and I had the person meet me somewhere near my job, so it doesn’t have to be a super time intensive endeavor. Now, on the decreasing expenses side, the key here is to make sure that you’re decreasing your expenses in a thoughtful way, in an intentional way, in a way that still allows you to make room for the things that are important to you or the things that you value, so you can still live your life in the process. I don’t believe in that scorched earth approach. You can’t take any vacations, you can’t go out to eat. You can’t do anything until you get out of debt, or until you build your savings or whatever goal you’re working toward. So here we’re going to make sure that we decrease your expenses in a way that still aligns with the things that you value, so you can still make room for those things. Now, making changes to big ticket items like your housing or your car payment is going to move the needle a lot faster than the typical advice that we hear of stop buying lattes or stop buying avocado toast. Those things tend to take up large portions of our income. They tend to be the biggest of our expenses. So my typical suggestion, or rule of thumb for your housing is you want it to be around 25% of your take home pay that still leaves plenty of room for the other things that you need to pay for, things that you just want and for you to make progress on your goals. With respect to your car payment, I recommend it be around five to 10% of your take home pay again, because that leaves you room for the other things that you need to pay for things that you want and your goals. So if you are outside of those ranges, that might be something that you can look at like, how can we decrease these costs? Doesn’t necessarily have to be selling right off top. There are other ways that you can decrease your housing expenses or decrease your car expenses. So you can explore different ways to do that, on top of that or beyond that. You can also make changes to your typical spending habit. So this is where people tend to go when they think about decreasing their expenses. So these are those smaller ticket things like food, like shopping, like whatever else you might be spending on. Again, the key is, any changes you make, you want it to be aligned with what is important to you or what you value. So a couple of examples, one of my clients really wanted to make sure that she made room in her plan to be able to keep her cleaning lady, she said that she works a lot. You know, her husband works a lot as well, and so knowing that they don’t have to worry about cleaning the house is really important to her. But on the other side, they were looking at their food costs and realized that they spent a lot of money on food, and it’s just the two of them, so they’re willing to make changes there in order to have room, to still have their cleaning lady and start making progress on the goals that they have. Another client uses one of the meal delivery services, and she was thinking about increasing how many meals she got, because she loves the convenience of just being able to pop the meal in the microwave and have something nutritious to eat. And so we looked at how she could get more meals to be able to also have the meal kit for lunch and for dinner. She currently is using it just for dinner, but when we looked at what that cost would be for her to get enough meals to have for lunch and for dinner, she decided that that was not worth it to her. She did not value having that food enough to pay the amount she would need to pay to have enough meals. So again, we’re looking at what is it that’s important to you, and aligning your spending with that. One of the biggest expenses that my clients tend to have, that most lawyers tend to have, are minimum debt payments. Decreasing these expenses helps a lot because they’re recurring payments. So once you get rid of it, you have freed up that money every month going forward. So one of the things that I talk to my clients a lot about is this concept of their overhead, right, the amount of money that it costs to run their life. So when you’ve got debt payments that are 1000s of dollars, if you didn’t have those debt payments anymore, that’s 1000s of dollars back in your pocket. So one of our key strategies is getting rid of those debts so that they no longer owe those minimum debt payments and they get that money back. So when you have that money freed up, you can use it for whatever you want to so you can roll it into paying off another debt, or roll it into another financial goal you have, or just have it for yourself if you want to be able to spend more in a certain category or something like that. But the main thing is, you have freed up that money every month for ever, so you get to use it however you want to. As you increase your cash flow in these ways, you’ll find that your budget doesn’t feel as tight anymore. You’ll find that you have more money in your account each month, even if you decide not to increase your income, which is how people often talk about increasing cash flow. By decreasing your expenses, you decrease that overhead, like we talked about, so you still have more money available each month. So as you can see, increasing your net worth is super simple. It is as simple as increasing your income and or decreasing your expenses. As I said, the key is being sure that you do it in a balanced way. We want this to be something that you can keep up with in the long term, because ultimately, that’s how you stick to your plan and actually get the results that you’re looking for. Often when people do the extreme, cut everything, I can’t go anywhere, I can’t buy anything. I’m just going to sit in the house. They might be able to do it for a little bit, but then they get tired of it, and often they go to the extreme in the other direction, and they’re splurging and they’re buying all of this stuff, and they wipe out the progress that they were able to do. So I don’t want that for you. I want you to achieve your goals, to increase your cash flow, decrease your debt, build wealth in a balanced way that still allows you to live your life, because that’s how you’ll stick to it. So that is all I have for you today. I hope these tips are helpful for you as you increase your cash flow this year. Please take a second and subscribe to the show. Leave a review. Both of those things help more lawyers to find it, and it helps us to get this information in the hands of more lawyers so that they can improve their finances as well. As always, I appreciate your support. As we close out, friend, I pray that you take the information you learn here, apply it in your life and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.