At this stage it is appropriate to understand the impact that cash flow will have on your investment returns. Simply defined, cash flow is the difference between Income and Expenses at any given point of time. Cash flow gets reflected in your bank balance.
Higher bank balances give you a false sense of security. You would tend to use it as a safety net and feel complacent. Higher bank balances also lead to more sporadic purchases and a spending spurge that may not actually be required.
This will result in you slowly increasing your standard of living and as a result you will incur higher expenses and lower proportion can be allocated towards savings. Improving one’s standard of living is not a bad thing. All of us do so in our lives. What is worrisome is that you take a wrong decision based on the illusion that you have adequate cash.
At the other end of the spectrum, low or negative cash flow will force you to borrow from friends or initiate minimum payments for your revolving credit, default on your mandatory payments. A default needs to be avoided under all circumstances as it would have an adverse (and in a few cases irreparable) impact to your credit score. Once you get into the habit of minimum payments; something that the credit card companies are keenly waiting for you to initiate, you will soon amass an insurmountable debt.
The ideal situation is to maintain low balance in your bank accounts and invest the access money in higher yield investments. The solution is simple – open a line of credit account that you can tap for a temporary period to fulfill your liquidity needs and pay it back once you receive the income. This is an ideal combination for you to keep low balances in accounts that do not yield you an honorable interest and creating a safety net.
Note that this privilege does not come without proper homework and self-awareness. You will need to do some homework and understand your past expenses and future spending trends to determine your requirements for the next 3-6 months so you can plan to live on the edge and still be viable from a day-to-day finance perspective.
Below example offers you an insight on.
Let us assume that you receive salary on the 1st and 15th of every month and majority of your spending is on 2 Credit Cards. You also pay home mortgage and electricity bill from your bank account each month. After you meet all your expenses, you will save a small amount each month.
The first step is to ensure that you change the Credit card payment dates to soon after you receive your salary. See example below to show the amount of liquidity that you would need in your bank account.
Table 1: Typical Monthly Spend
| Date | Income/ Expense Description | Transaction Amount | Balance |
| 1/1/2021 | Opening Balance | $5,000 | |
| 1/1/2021 | Salary Credit | $5,000 | $10,000 |
| 1/1/2021 | Mortgage EMI | ($2,100) | $7,900 |
| 1/2/2021 | Credit Card 1 Payment | ($4,000) | $3,900 |
| 1/3/2021 | Credit Card 2 Payment | ($3,500) | $400 |
| 1/10/2021 | Electricity Bill | (200) | $200 |
| 1/15/2021 | Salary Credit | $5,000 | $5,200 |
If you observe the table closely, your bank balance comes down to a very small amount and in a few cases would turn negative as well. In order to mitigate this, you would have to keep a higher balance in your account (which will eat into your existing investment).
A simple hack is to adjust payment dates for credit card to smoothen out your cash flow. Credit card companies are willing to change the payment dates if you call them. See example below:
Table 2: Spend after AdjUsting Credit Card Payment Dates
| Date | Income/ Expense Description | Transaction Amount | Balance |
| 1/1/2021 | Opening Balance | $5,000 | |
| 1/1/2021 | Salary Credit | $5,000 | $10,000 |
| 1/1/2021 | Mortgage EMI | ($2,100) | $7,900 |
| 1/3/2021 | Credit Card 2 Payment | ($3,500) | $4,400 |
| 1/10/2021 | Electricity Bill | (200) | $4,200 |
| 1/15/2021 | Salary Credit | $5,000 | $9,200 |
| 1/17/2021 | Credit Card 1 Payment | ($4,000) | $5,200 |
With the small change of adjusting the Credit Card 1 Payment after you receive the second bi-monthly paycheck, the bank balances are in a comfortable range. The fluctuation in balance is lesser.
This gives you a better avenue to invest money or transfer money to Line of Credit and reduce debt and thereby reduce your interest burden. Let us assume that you have a Line of Credit (LOC) that will let you overdraw money when required and repay it when your cash flow needs are fulfilled.
Table 3: Spend after Working with HELOC Account
| Date | Income/ Expense Description | Transaction Amount | Balance |
| 1/1/2021 | Opening Balance | $5,000 | |
| 1/1/2021 | Salary Credit | $5,000 | $10,000 |
| 1/1/2021 | Mortgage EMI | ($2,100) | $7,900 |
| 1/3/2021 | Credit Card 2 Payment | ($3,500) | $4,400 |
| 1/3/2021 | Transfer to LOC Account | ($4,000) | $400 |
| 1/10/2021 | Electricity Bill | (200) | $200 |
| 1/15/2021 | Salary Credit | $5,000 | $5,200 |
| 1/17/2021 | Credit Card 1 Payment | ($4,000) | $1,200 |
In the above example, you can transfer $4,000 to Line of Credit account and still maintain a steady cash flow. Do not get perturbed by the low balance in your current account. It is anyway not going to earn you a decent (or any) interest. You are rather using the excess money in your current/ savings account to pay your debt.
Also notice that with just a few changes to the payment dates to coincide with the income dates and keeping a line of credit handy, you can start saving money and keep a low balance in your account.
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