# Understanding Cash Flow, or How to Make (a Little) More Money From What You Already Have.

Pop Quiz, Hot Shot.

You have the following credit cards/checking accounts with the following attributes:

Card 1: 24.99% APR, 30-day grace period, \$500 limit, No balance, 1.5% Cash back on purchases, accepts balance transfers; no cash back on balance transfers

Card 2: 19.99% APR, 30-day grace period, \$900 limit, Current balance of \$300 (accruing interest), does not accept balance transfers

Card 3:  10.5% APR, 15-day grace period, \$1500 limit, current balance of \$900(accruing interest), accepts balance transfers, balance transfer rate is 13.5%, with grace period

Checking account:  2.53% APY, Calculated on the average daily balance of the account

How do you optimize your monthly cash flow over several months with an income of X dollars per month, paid in 2 equal installments of X/2 over the course of each month, when you have monthly expenses of  .75(X)?

You might be thinking, “Whoa, now. The SAT’s were a few years ago, this is awfully complex. Why would I need all this math?”
The answer of course is to maximize the resources you have. A 1.5% discount on your spending might not seem like much, but it’ll make for a nice start when you’re looking to save up.

Basically, this question is about being able to understand and allocate resources in an efficient manner. So, how do you solve this problem?

1. Balances from Card 2 should be transferred to Card 3, and paid off on the last day of the grace period.
2. Monthly expenses should be put on the Card 1 to earn cash back,  and then transferred to Card 3 at the end of the grace period (to avoid interest and allow for an extra 15 days grace period),
3. The existing balances should be paid off at a rate of .25(X) per month, to minimize interest.
4. (Optional) Call Card 1’s issuer and ask for a limit increase,
5. After balances are paid off, you should be earning  1.0253(1/12) * (1.5 X + .26125(X*N-1) + (previous months’ interest))  each month, since you now are able to keep  your cash for ~45 days (1.5 months), and thanks to the cash back, you are spending 73.875% of your income on expenses instead of  75%. N represents the number of months since all cards were paid off. Card 2 would be kept open and paid off, both for emergencies, and to lower your utilization.

Right about now, most people are thinking, “What the What? I don’t even…”
Here’s a breakdown of what we did, step-by-step:

1. Moved the high interest debt to a lower cost opportunity, including 15 days interest-free.
2. Change the spending habit to put the monthly expenses on a card that gets cash back. This has the net effect of either lowering the amount you pay for things, meaning instead of spending \$75 of every hundred dollars, you’re spending \$73.875.
3. Now, we’re aggressively attacking debt, meaning debt will get paid off in the shortest time frame possible with our available resources.
4. With a low-limit card, a bit more breathing room will make sure you can afford to put as many of your expenses as possible on the card and earn cash back.
5. This step is a projected balance for few months down the road, but here’s what’s going on:
1. Your monthly account interest is 1/12 of 2.53% Annual Percentage Yield, so to get that, we use the compound interest formula of 1 + interest rate ^(period).
2. We multiply our monthly account interest by the balance in the account, which is the sum of
1.                                                                i.      1.5X – Three Bi-weekly paychecks (45 days)
2.                                                              ii.      .26125(X*N-1) – Your Monthly Savings Rate (100-73.875=26.125) times the total number of months (N)  since you paid off your credit card debt, minus 1 (which is included in the three bi-weekly paychecks.
3.                                                             iii.      The sum of the interest paid to you for the last N-1 months.

All of this is a very powerful system. Now, instead of paying around \$30 in interest each month, you’re getting \$15 from the credit card company, usually applied to the balance of your purchases. Depending on the card, your own spending habits, and the offers available you could end up with double or even triple that amount. The key to all of this is ensuring you keep your credit cards paid off each billing cycle. By doing this, you’re holding on to your money as long as possible, being paid by companies for the privilege to loan you money interest-free, and earning interest.

Until next time, eat a little more debt.

# So, What IS “The Plan” For Personal Finance?

The plan will be different for everybody, and the problem with many “personal” finance gurus is that they deal in “general” finance rather than personal finance. While the advice is generally pretty good, it often overwhelms people, much like drinking from the fire hose.  The general advice you’ll hear is (in this order):

1. Build a small emergency fund (~\$1000 or 1 month’s expenses).
4. Fund an emergency fund with 6+ months of expenses.
5. Fund a Roth IRA to the annual Max
6. Bump up your retirement plan savings to the annual maximum.
7. Save into any tax-advantaged plans you have available
8. Open a taxable investment account and invest in Exchange Traded Funds (ETFs) that track the market as a whole.

Most people have trouble with step 1, and will be lucky to get through step 3. Step 4 is a pipe dream for quite a few people, and the idea of maxing out not just one, but TWO retirement accounts sounds like grounds for an intervention because there is a lot of crack being smoked.

Let’s look at the near worst case scenario

So, what are you to do in this situation? How can you get through all of this when you’re only bringing home around \$600 every two weeks? The answer a lot of people will get when they are honest with themselves is that sacrifices will have to be made. Whether it’s cable TV, the new iPhone, or your free time, if you are in this situation where you have this little cash coming in AND you have debt, you probably are either deluding yourself that if you keep on the treadmill things will get better, but the fact is that interest every month when you don’t pay off your cards is speeding that treadmill up, and eventually you’ll fall off.  An overdraft or two, and suddenly you’re eyeing a payday loan place just to solve the problem. Stop. Now. If you’re in this situation, let’s back up the cardiac arrest, take a few deep breaths and give you a rational plan to deal with this:

1. Gather up all your monthly bills and pay stubs, pull up your online banking, too.
2. Look at what you spend your money on, and decide what you want to cut.
3. Keep cutting until your bills and expenses are less than your pay.
4. Next, make calls to all of your credit card companies, and ask for lower interest rates.
5. Add up all of your minimum monthly payments and monthly recurring bills.
6. Open a new checking account, preferably without a debit card.
7. Set up your direct deposit to go to two accounts: one for half the amount you got in step 5, and one for the remainder.
8. You’ve now built a self-funding small emergency fund.
9. The remaining money should cover your expenses (groceries, gas, etc).
10. At the end of every two weeks, the night before payday, take any remaining money, and pay it on your highest interest account. You’ll pay down your debt a little faster and start to see some progress.
11. If you’ve made it this far, and you’re still having some trouble making ends meet, go back to step two, and be honest with yourself.  Cutting cable TV alone will save you between 600 and 1200 a year.

If you just read the last section and didn’t cringe a bit because it hit a bit close to home, then you likely grew up with some good financial habits, or have had the income to mask some problems. So, let’s ask you a few questions:

• Are you carrying any interest-charging credit card debt? How Much?
• Do you have a car (or any other type that isn’t student) loan over 5%?
• How much are you saving each month?

If you have more credit card debt than what you could pay off in your next two pay checks, after expenses, and you’re saving (rather than investing) money above a small emergency fund, congratulations, you’re throwing money away. Anything with an interest rate is considered to be “toxic” debt, and you should eliminate it quickly. 5% is used, because it’s generally accepted that returns on investment will be over 5%, so you would miss out on returns by paying off debts with interest rates under 5% faster than necessary if you were to use investments to do so.

I know you thought you were getting off easy, but you’re still in close to the same boat as the near worst-case folks, but likely without the constant fear of overdrawing your bank account.  Knowing this, you still need to budget, and get rid of the debt you’re throwing money away on. Your plan of attack should be to get organized (see above), and pay off the highest interest accounts first, working your way to the lowest accounts. If you can work without separate accounts feel free, but it will likely be easier to set things on auto pilot.

“Hah! Look at those suckers! I’ve got stuff together, straight cash for me!”

Oh?  You’ve eliminated all your toxic debt and are saving now? Have you optimized your spending habits to make it so credit card companies are providing you with interest free loans AND paying you for the privilege of having you use their card?  If not, you’re still leaving money on the table, just like those “suckers.” We’ll cover this more in the near future, but for now, if you’re at this point, life’s pretty good. Go check on your retirement accounts, and see if you can contribute a bit more in there for now, and we’ll get to the rest soon.

Until next time,  go  hunt down some debt!