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What is Cash Flow Banking and How Can it Be Managed?
Cash flow banking is a system of managing cash flows with the goal of improving them as much as possible. It's a complementary financial strategy to traditional saving and investing, but it is also more specific. In this case, the goal isn't long-term growth or retirement security; instead, cash flow banking aims to solve short-term problems like unexpected expenses, emergencies and slow-paying clients.
To make it work, you'll need to start by tracking your cash inflows (the money coming into your accounts) and outflows (what you are spending it on). You can do both with the help of automated software like Quicken or Mint.com, which link up with your bank account and credit card providers. The idea is to get a clear picture of your finances so that you can adjust your spending accordingly.
A cash flow management plan must include a category for "surprise expenses" – things like car problems, vet bills or home repairs. It's essential to have an emergency fund in place before the rainy day arrives, so you don't have to resort to high-interest debt to pay for them. One way to build your emergency fund is to automate transfers from your checking account to a savings account (or a high yield online savings account) on a regular basis. This will help you make headway on your goal without having to think about it too much.
The next step is to create a plan for your income and expenses. First, analyze exactly how much money you're bringing in each month. If there are any large fluctuations (for instance, if your company's revenue tends to fluctuate) they need to be taken into account here as well. Once you know how much money you have to spend, it's a good idea to create a budget. Crunch the numbers and figure out how much you can allocate to fixed expenses (rent or mortgage payments, insurance premiums etc.) as well as variable ones (food, utilities).
Now that your figures are in place, you need something to keep them there. The best way is to automate your cash flow plan – which means you should also be setting up auto-pay for any bills that can't be paid online. This way, the due dates and amounts will come and go without much input from you, which is particularly useful if you won't have access to a computer or your bank records at work.
Finally, it's important to be mindful of your credit utilization ratio. This number – which is calculated by dividing your total credit card balances by your total credit limit – is one of the key factors that lenders look at when they're considering you for a loan or line of credit. Ideally, you want this number to be below 30%, so keep that in mind when you're preparing to renew your existing credit or apply for new lines of credit.
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