Managing Your Cash Flow May Lead to Better Returns

By Mike Winesburg
3/19/2010

Are you dissatisfied with your investment returns?  Worried about the economy and future of the stock market?  Or wondering how to recover from all the losses incurred over the past couple of years?  If so, you're not alone!  Although much of it is completely out of your control there are some things you can do right now that could improve your situation. 

You may be unknowingly and unnecessarily squandering 3-5% of your income simply because of poor money management habits.  And, by money management I mean cash flow, or the methodology in which you distribute or direct your hard earned dollars each month.  This is an area of financial planning that often gets overlooked but the one in which we have the most control. 

Consider a bucket of water which in this case represents your savings.  Your monthly income (cash flow) would be a steady stream of water flowing into the bucket.  The goal, of course, is to fill the bucket.  One problem though- the bucket is full of holes.  These holes represent your expenses (taxes, interest, insurance, etc.).  It's not hard to figure out that the more holes in your bucket the longer it will take to fill. 

Naturally, we can think of just two ways to fill our buckets up quicker.  Dump more water into it (more income), or start plugging holes.  It's the latter that I'd like to focus on.  And more often than not, the one we have more control over.

Rarely can you plug just one big hole.  By plugging several small holes, though, you could see a huge impact on your finances.  That's what cash flow management is all about.  Making a series of small corrections in how you direct your money so as to shave a half percent in interest expenses here, another couple percent in taxes there, and so on.  Before you know it, you've might save as much as 3-5% from the cumulative of just a few small moves.  And let's be clear….. I'm not talking about giving up your daily latte or making sacrifices that diminish your standard of living. 

An obvious place to start is making sure you're paying the lowest interest possible on any debt you have.  The not so obvious is how much to pay towards any given debt in any given month.  Having a clear debt repayment strategy is essential to minimizing your overall interest expense. 

Allocating too much towards your debt can also be a costly mistake if your net cost of borrowing is less than the expected return of an investment.  For example, assume you have a mortgage at 5% that is tax deductible.  If in the 33% tax bracket, your net effective rate is more like 3.35%.  If the net after tax return on your investment account is 7% then paying extra towards your mortgage is costing you 3.65% in lost opportunity. 

Another common mistake can be illustrated here.  Holding $20,000 in a savings account for emergencies may seem like a prudent thing to do.  Doing so while maintaining a balance on a credit line, however, will in some cases cost you.  Applying the savings towards any credit debt could give you a rate of return equal to the amount of interest being charged on the debt.  And, assuming the credit line remains open and available to you, the same $20,000 will be available to you in case of an emergency.  

Cash flow management is about "location, location, location", and understanding that all cash flow decisions have a rate of return.   Where you choose to locate your income will become an important indicator of your ability to maximizing your financial potential.  Mastering your cash flow and becoming a better steward of your money can assist you in securing a brighter future without sacrificing your life today! 

Mike Winesburg is a wealth advisor with McKinley Carter Wealth Services (www.mc-ws.com), an SEC registered investment adviser with its principal place of business in the State of West Virginia. The information contained herein is general market information only and is not intended to be personalized investment, financial planning or tax advice. All market returns are hypothetical and are not guaranteed.  Investing involves risk including the risk of loss. Mr. Winesburg can be contacted at mwinesburg@mc-ws.com, 304-230-2400, or 866-306-2400.