If your budget is like that of so many other households, it may seem like you never have quite enough cash on hand to pay all your bills at the end of every month and still set aside a few extra bucks for a rainy day. And these days, your cash crunch may be worse than ever if your expenses are rising, your income is falling and your credit limits are being shredded.
Though there aren't really any new ideas in cash management, financial planners suggest six tried-and-true techniques that can help you improve your liquidity and boost your cash flow without resorting to such drastic measures as selling your home, bailing out of your long-term investments or even raiding your jewelry box.
1. Stop spending. The first line of defense against a personal cash crisis is to slash your budget so you're living within your current means, says financial planner Karen Keatley, owner of Keatley Wealth Management in Charlotte, N.C. That's a message many people don't want to hear, but it's especially important for small business owners, Realtors, car salesmen and stockbrokers whose income fluctuates from one month to the next.
6 ways to improve liquidity
"If you have a job with a variable income stream, like a sales job, you have to live to the low level. You can't live to the highs," Keatley says. "Once people are in financial distress and can't keep up, they have to think about downsizing their lifestyle."
The quickest way to cut your expenses is to examine your checking account and credit card statements for the past few months and identify any opportunities to reduce discretionary purchases or put the kibosh on automatic subscriptions and membership renewals that consume cash.
When people see how much they are spending "in black and white, they change their behavior," says financial planner John Belluardo, president of Stewardship Financial Services in Tarrytown, N.Y.
2. Pay off debt. One of the most rewarding ways to cut your costs is to reduce or eliminate monthly finance charges that you incur on your credit cards, home equity line of credit and other debts. Pay down the balance on your highest interest-rate debt first and pay more than the minimum payment each month, so you can take advantage of what Belluardo describes as a "snowball" effect: "Even if you pay the same amount every month, more and more goes to principal, which means that the debt gets paid off faster," he says.
Paying off your debt can actually improve your monthly cash flow even if you have to spend cash to do it, suggests Robert Bartley, president of Bartley Financial Advisors in Bedford, N.H.
"Many people have a mindset that they have to keep $25,000 in their bank account, but then they owe $10,000 on a credit card. They are paying 8 percent (on the credit card) and getting only 2 or 3 percent (on the bank account)," Bartley says. "Same with a home equity line: If you're paying 6 percent (on a home equity line) and (getting) 2 percent or zero on your checking account, you are losing every month."
3. Get rate cuts. Even if you're not able to make a sizable dent in your debt, you can ask your credit card company to lower your interest rate or you can transfer your balance to a different credit card that has a lower rate. Either way, lower finance charges will reduce your monthly costs, improve your cash flow and help you pay off your debt sooner. Be cautious about balance-transfer offers: Some credit cards have high fees that outweigh the benefit of a lower interest rate.
If your cash crunch is due to unaffordable mortgage payments, you might be able to refinance your loan. The federal government and some states offer attractive foreclosure-prevention financing for people who are overextended and meet the qualifications.
4. Earn more interest. Another way to improve your monthly cash position is to transfer extra cash in your checking account into higher yield investments such as short-term CDs or money market funds. Even a savings account could be a smart move if you have any cash that's not earning some sort of return, however small the amount may be.
The downside is that these types of investments are "sort of a losing game" because they rarely earn a high enough return to overcome inflation, Keatley warns. Worse yet, bank fees can wipe out or exceed any interest you earn on a checking or savings account. If you have multiple accounts that are dinged to the tune of $10 or $12 every month, you might want to reduce those costs by consolidating your cash into fewer accounts. Don't exceed the Federal Deposit Insurance Corp., or FDIC, limit of $250,000 in any one account.
5. Tap your equity. A severe cash shortage that can't be ameliorated by spending cuts or investment reallocations may necessitate some type of short-term debt to resolve. Planners generally suggest a home equity line of credit first, followed by a retirement account loan and then credit card debt only as a last resort.
"If people are disciplined and know how to handle credit, I love to see them get a home equity line of credit on their house when they don't need it because that can be a serious source of cash," Belluardo says.
These lines of credit aren't as readily available as they once were, but if you have equity in your home and a means to repay the debt, getting a home equity line can be good strategy.
6. Borrow against savings. If you have an Individual Retirement Account, or IRA, you can take out cash without incurring an income tax penalty as long as you repay the full amount within 60 days, according to Bartley.
"The IRS rule is that you can take money out of your IRA, and if you can prove that you put it back in, it's not considered a withdrawal," he says.
If you have a 401(k) retirement plan through your employer, you can borrow up to $50,000 of your own funds. Be aware, however, that if you don't repay the full amount before you leave your job, whatever you still owe will be treated as a premature withdrawal subject to income tax penalties, Bartley explains.
Either way, "you have to be careful that you have the ability to pay back (these loans) in the short term or you will find yourself in bigger problems later," Bartley says.
At the end of the day, the best solution for your cash crunch may be a combination of all these strategies, each to a greater or lesser degree depending on your personal situation. After all, as Bartley notes, "wealth is a brick-at-a-time kind of thing. The sum of a lot of little things can really make a big difference."