The Psychology of Cash Flow

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Money flows into your life, and money flows out. To deal, you need to get your finances right — but also your mind. (See also: Managing Your Short-Term Money)

Are your finances under control? One good test is how your spending is constrained by your income.

Far too many people are forced to arrange their bill paying around their income schedule. They put bills aside until their paychecks arrive, then they write the checks (or authorize payments online), hoping they don't run out of money before they run out of bills.

If your finances are under control, there's no need to do that. You always have enough money to pay your bills, whether "payday" is today or tomorrow or next week.

Control Your Finances

You only need two things to get your finances under control:

1. You need to have an income that's larger than your expenses.
2. You need to have "enough" money sitting in your checking account.

In this case, "enough" is a reasonably specific amount — enough to pay the largest sum of bills that can be expected to arrive between two paychecks. For most people, one month's expenses is a handy target. There are, of course, special circumstances, such as annual or semi-annual bills for car insurance or property taxes. You could just leave enough money in your checking account for those, but they're probably better handled by accumulating money in some sort of savings or investment account.

If those two measures aren't in place, you need to take action right away. Perhaps emergency belt tightening is in order to get your expenses below your income, and then to accumulate the appropriate cash balance in your checking account. But even once you've got those measures in place, getting this right is tough, because this isn't just a matter of getting your finances under control. You also need to get your mind under control.

Case in point — me.

Not having a regular job, I get my income from various sources — interest, dividends, payments for my stories or articles, and so on.

One of my regular payments used to arrive late in the month, but a while back things got rearranged, and it started arriving early in the month.

This turned out to have an unexpected psychological impact.

Here's the thing — the payment used to arrive shortly before we'd make the monthly transfer into our checking account to cover that month's expenses. Now, the payment arrives half a month away.

Before, it felt like my writing income was paying a big chunk of the bills, and then we'd transfer money to cover the various small expenses that show up over the course of the rest of the month. Now, it feels like we're drawing down capital to pay our bills, while my writing income ends up dribbling away to pay those ancillary expenses.

The reality of the situation hasn't changed at all. The right way — the smart way, the useful way — to think of the situation is to view all the money that flows into my life as my money. I've written about this before — it's all your money.

Control Your Mind

It's hard to defeat the notion that the dates that the money flows in and out make a difference. But even though it's hard, it's worth doing.

Getting this right is key to financial success.

Get your finances under control. Your spending should be controlled by your budget, not by when your paycheck arrives. See past the illusion that money that arrives one day has anything to do with the money that gets spent the next.