5 Weeks to Better Cash Flow

March 1, 2005

When you depend on commissions, cash flow can fall off at any time. To protect yourself, you need to put extra focus on winning the cash-flow war, says Fred Rewey, president of the American Cash Flow Association and author of Winning the Cash Flow War (John Wiley & Sons, 2005).

Week One

Know what you spend—and what you owe.

  • Make a list or a spreadsheet of all current monthly income sources, regular and recurring expenses, and outstanding debts. A good model can be found at the Consumer Credit Counseling Services site, www.cccsintl.org.
  • Stop the “leakage.” Some people can spend up to 30 percent of their money in small purchases, says Rewey. Keep a log for one month to track expenses.
  • Level out your cash flow. Resist the urge to increase either personal or business spending in a good year. Instead average your income over a number of years and use the average as a basis for budgeting.

Week Two

It’s hard to stick to a total austerity program for long. Remember your last diet? But you can cut back and see positive results, says Rewey.

  • Downsize your discretionary spending. Rent a video instead of going out to a movie, pick up nice quality takeout instead of going to a restaurant, and wash your own car, suggests Richard Jenkins, executive editor of MSN Money.
  • Ask for cash discounts. Credit cards cost merchants more—1.25 percent and up—than if you pay by cash or check. Offer to pay cash; then ask for a reimbursement on what you saved the merchant.
  • Analyze your selling expenses, and eliminate those that don’t pay off. Determine the cost per lead for the advertising media you use. Code each advertising source, calculate the number of leads you receive from the source, then divide the number by the total expenditure. Focus your advertising efforts on those with the biggest payoff.
  • Reduce banking fees and surcharges. In this low-rate environment, lower fees save you more than the small amount you earn on interest-bearing checking accounts. Also look for banks that offer low- or no-fee deals for special groups, such as those over 50 years old.

Week Three

Get out of the interest trap. Interest paid on debt, with the exception of home mortgages and some home-equity loans, is nondeductible and a total drain on your cash flow.

  • Assess which debts have the highest interest rates and repay them first. According to Terry Savage, Chicago Tribune columnist and author of numerous books including The Savage Truth On Money (Wiley, 2001), if you double the monthly minimum payment (and don’t charge any more), you’ll be out of debt in approximately three years.
  • Apply for credit cards with lower interest rates. Check out lowrates.com for a comparison of card rates. Rewey suggests negotiating with credit-card companies to obtain a lower rate (your current credit card company doesn’t want to lose you) or transferring balances from high- to low-rate cards. Beware: Transferring balances can affect your credit rating if the cards are new. The transfer creates additional credit inquiries, which can lower a rating.
  • Roll debts into a home-equity loan. You can deduct the interest payments for loans used to pay off debts. Deductions are limited to the lesser of $100,000 or the total fair market value of the home reduced by the total home acquisition, including sale price, points, and commission, and any grandfathered debt.

Note: Grandfathered debt is defined as mortgage loans on your current home taken out before Oct. 13, 1987. For more details, read IRS Publication 936, Home Mortgage Interest Deduction, available at www.irs.gov.

Week Four

Increase your income. It’s the easiest way to save, especially if you can reduce your living expenses too.

  • Prospect more. Determine how many contacts it takes to make a sale; then be sure you make at least that many contacts each week. Use the Income-planning Worksheet.
  • Use your free time to earn a second income. In NAR’s 2003 Member Profile, REALTORS® worked an average of 40 hours a week. An easy way to enhance income is to do something related to sales, such as appraisal or property management, suggests Rewey. Or act as a consultant on seller carryback financing. With this specialty (which may require a license in some states), you can use your real estate contacts to connect sellers with funders (private individuals or insurance companies that will purchase the loan for a lump sum) and pocket a referral fee on the sale.
  • Turn a hobby or skill into an income source. If you antique, sell your finds on eBay. If you’re great at home repairs, offer to help your all-thumbs neighbors.

Week Five Save 10 percent of your earnings, more if you work on commission, says Rewey.

  • Save more. Thanks to the miracle of compounding, a $3,000 annual investment in a Roth IRA, growing in the stock market tax-free at an historical average return of 10.6 percent, will net you more than $600,000 in 30 years.
  • Use automatic reinvestment plans. Many stocks and mutual funds offer automatic deduction plans that take money from your checking account on a monthly basis and buy stock, which can then be deposited in your retirement account. Be sure to select the option to reinvest your dividends for added savings. You can also set up an automatic deduction for U.S. Savings Bonds.