Wouldn’t it be nice if you could just decide to delay paying your bills for four months, like Boeing Co.?
As The Post and Courier reported last week, Boeing has decided to delay paying vendors’ bills for up to 120 days in order to improve its cash flow. Of course, individuals generally don’t have the ability to do that — we’d get socked with fees, interest charges and maybe litigation. But managing cash flow does play a role in personal finance, and there are some steps individuals can take.
Cash flow is pretty much what it sounds like: the pace at which money is coming in and going out. Slowing the pace at which money goes out, as Boeing is doing, means having more money on hand for a longer period. And having more money on hand can mean lots of good things, such as the ability to pay bills without borrowing and the potential to earn extra interest on the money.
The most obvious example, for individuals, is paying bills with credit cards, and then paying off the card balances in full when they come due, incurring no interest charges or fees. For example, my utility bills are paid with a credit card each month, essentially pushing the due date for those bills forward by a month or more, when the credit card bill will be due.
In that example I didn’t reduce my expenses, but I improved my cash flow. The money that will eventually be used to pay those bills earns an extra month or so of interest, each time — though that’s hardly worth mentioning at today’s interest rates — and I get a little money back, between 1 percent and 2 percent, by using a credit card.
People who carry balances on credit cards are temporarily improving their cash flow, but at great expense, trading off lower bills today for higher expenses over the long term.
Another example of personal cash flow management is the decision people face when securing or refinancing a loan. Longer loan terms mean lower monthly payments, and improved cash flow. Longer loan terms do come with costs, including paying more interest over time and typically paying higher interest rates as well.
However, with mortgage rates at historic lows, some people find that a 30-year mortgage with low payments makes sense, even if they could afford to pay off the house faster. For example, Facebook’s billionaire CEO Mark Zuckerberg, one of the richest people in the world, refinanced his $6 million home in 2012 with a 30-year loan. That freed up millions of dollars for him to invest.
For people of more modest means, there is great value in having money in the bank, an emergency fund that can be tapped if hardship strikes. Too many people in the U.S. have repeatedly told pollsters that they couldn’t handle an unexpected expense in the range of a modest car repair.
Improving cash flow by delaying expenses doesn’t mean you’ll have more money, but it can mean you’ll have more money available in the short term.
Pushing out the dates when you have to pay bills, as in my credit card example, essentially gives you a one-month delay, which is an opportunity to bank a month’s worth of bill payments. Deciding to carry a 30-year mortgage instead of a 15-year or 20-year mortgage, in contrast, is an opportunity to set aside some savings every month — assuming you could have afforded higher payments on a shorter-term loan.
Another opportunity for cash flow management comes from medical Flexible Spending Accounts offered by many employers. An FSA allows employees to direct some of their pay to an account for out-of-pocket medical expenses incurred during the plan year, avoiding income and payroll taxes on those funds (employers like this because they also avoid payroll tax on those funds).
The cash flow opportunity comes because, under federal rules for FSA accounts, an employee can spend the entire year’s FSA amount on the first day of the plan year. That means, for example, you could tap your account to pay for a child’s braces in January, and “pay back” those funds throughout the year as the FSA money is deducted from paychecks, in more manageable amounts.
Good cash flow management can smooth out some of the financial bumps, and play a role in handling personal finances.