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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.
"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.
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| 6 ways to improve liquidity |
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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 (percent) 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.
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