Managing your cash flow to pay off debt

Debt is one of the biggest problems for individuals to overcome in order to gain control of their finances. It is not just a problem for individuals but also to corporations and even entire nations. The recent events of the global financial crises highlighted to the entire world the volatility of our economy and ultimately our way of living.

We are constantly bombarded by ads. Whenever we look there is advertising trying to entice us to spend. It is no wonder that advertisement and the availability of credit keeps on driving individuals into debt.

A recent research in Australia shows that the combined credit card debt is higher that house mortgage in the country. We shouldn't try to read too much from those statistics because it includes families that rent, and therefore don't have a mortgage. Nevertheless it is an indication of a big problem lurking around our societies.

Following are a few tips on how to pay off debt.

Manage your cash flow

The most important aspect of your finances is your cash flow. If you don't know what cash flow is click here (come back immediately after you finish reading it).

In summary cash flow is the management of the money coming in and going out. You need to have sufficient cash coming in to cover for the expenses. The first step is to know how much money you earn and how much money you spend on a weekly, fortnightly or monthly basis. Once you know your cash flow position you can start to take action to pay the debt.

Any extra income you earn should be channeled to pay off the debt. Don't keep on paying the minimum amount, pay as much as possible so that interest is reduced and you will pay off the debt faster.

What if your cash flow is negative?

Unfortunately many people find themselves with debt and not enough income to pay the debt, in summary, the total expenditure is higher than the income. As a result you probably have to use your credit card to boost your cash flow until you get paid. Once pay day comes around, you pay a little of the credit card debt off and the vicious cycle starts again.

The danger of falling into this scenario is that you probably have a perception that everything is fine. You always pay all your bills, including some of the credit card debt, and you think you don't have financial issues.

The answer is unfortunately very simple, if your cash flow is negative you need more money either by cutting expenses or by earning more money.

Cutting your expenses

There are many links n the internet that give you plenty of tips on how to cut your expenses. Following are a few links that can help you to reduce some of the daily expenses:

• http://www.hughescomputerconsulting.com/tips/finances/0019.htm

• http://www.rediff.com/money/2009/jan/22perfin-10-cost-cutting-tips-for-now.htm

• http://www.kelloggforum.org/cut-your-living-expenses-in-half/

Earning more money

The easiest way to earn more money is to work more. Nobody wants to do that, you already work enough during the week, you don't want to find another job during the weekend or at night time.

Unfortunately you need to find other sources of income to get your cash flow in a positive scenario so that you can reduce your debt and start saving.

You are not limited to finding another job, you can get creative and open up a low cost business from home where you can be around your family and still work during the weekend. Other options for alternatives sources of income include:

• http://www.mytwodollars.com/2008/02/21/how-i-make-extra-money-and-rewards-every-single-month/

• http://www.moolanomy.com/462/30-alternative-income-ideas-and-resources/

• http://www.moolanomy.com/364/six-streams-of-income/

There are many other tips and advices I could provide to help you to get out of debt including debt consolidation, drawing money from your mortgage to pay off unsecured debs and others.

The most important advice is to take action to ensure that you have a positive cash flow and tat you pay off the debt. It is possible.

Your financial independence weekly compilation

Welcome to the June 23, 2010 edition of Financial Independence weekly compilation.

The Investor presents Two new personal finance tools posted at Monevator.com, saying, "These two tools - with state-of-the-art graphs - will help you sort out your finances."

Tim Chen presents Just in Time for Summer: Save Money with the HHonors Hotel Rewards Program posted at NerdWallet Blog - Credit Card Watch, saying, "The Hilton HHonors rewards program can yield some serious benefits if you know how to use it. Follow these tips to save money on your summer vacation hotel stays." Joshua Dorkin presents 3 Non-Conventional Ways to Find Real Estate Deals posted at Real Estate Investing For Real. Ryan @ MFN presents Roth IRA Conversion posted at The Military Wallet, saying, "What is a Roth IRA conversion, who is eligible to make a Roth IRA conversion, and is it right for you?" LearnSaveInvest presents 7 Best Tips For Building Wealth Series: Tip 1 posted at Learn Save Invest, saying, "The first post in a series about the best financial tips to build your wealth. Be sure to check out all 7 tips!" Elizabeth presents Debt Consolidation Works Best When Financial Discipline Is Adhered To posted at Payday Loan Debt Consolidation Blog, saying, "You are happy after availing the services of a debt consolidation company and hope that now it will be convenient for you to pay off the debts. Further, you might heave a sigh of relief since all the creditors will now be handled by that company. You might be mistaken." Nissim Ziv presents Mid Life: Career Change at 40 & Career Change at 50+ posted at Job Interview Guide, saying, "It is said that the only thing that is certain in life is change. Though this phrase has been proved quite many times, there are some situations where a change seems not only implausible but also impossible.." Anand presents Ontario Shows the Way in Payday Loan Reforms Process posted at Best Payday Loan, saying, "Online lending companies have made borrowing easy loans have become very accessible. You don’t need to worry about your credit history anymore. With the fast easy cash advance, you can repay the borrowed amount on the salary day and that will be the end of it." Kim Luu presents Financial Security Takes More Than Being Frugal posted at Money and Risk, saying, "Attaining financial independence requires self education, savings and being aware of choices." Claudia Gonella presents When Retirement Looms, Retreat to Central America posted at Real estate investing in Panama, Costa Rica, Nicaragua and Belize, saying, "Taking control of your finances at retirement by seeking out countries with a lower cost of living." Kaushik Chokshi presents World Trends posted at Beyond Karma, saying, "What's in the future?" My Journey presents When Operating your Side Business Remember to Value ‘You’ posted at My Journey to Millions. That concludes this edition. Submit your blog article to the next edition of financial independence using our carnival submission form.

Past posts and future hosts can be found on our blog carnival index page.

Your Financial Independence - June 20, 2010

Welcome to the June 20, 2010 edition of financial independence.

nissim ziv presents Career Aspirations: Examples of Career Aspirations posted at Job Interview Guide.

Jane Spiegel presents 6 Reasons Why Online Casinos are a Good Choice of Gambling posted at Online Casino Mirror, saying, "Reviews on Best Online Casinos with free online casino bonus codes. Casino news and promotions of online casino games."

nissim ziv presents Career Goals: Examples of Career Goals and Objectives posted at Job Interview Guide, saying, "It is only when a person has a clear thought about his/her career goals and objectives that he or she gets ultimate satisfaction from his/her job and therefore progress faster."

Charles Chua C K presents 10 Things to Avoid in Money Matters posted at All About Living with Life. Wenchypoo presents Skipping STILL MORE Nickels and Dimes For Bigger Savings (L-O-N-G) posted at Wisdom From Wenchypoo's Mental Wastebasket, saying, "Financial independence is not the money you make--it's the money you KEEP!" Wenchypoo presents MORE Timeless Moves You Can Make to Maximize Income and Minimize Taxes posted at Wisdom From Wenchypoo's Mental Wastebasket, saying, "Started in '05, and added to ever since." Wenchypoo presents D-I-Y Economic Reform--Starving the Evil Piggies posted at Wisdom From Wenchypoo's Mental Wastebasket. Wenchypoo presents Revised: Cheap Eating with Cost-Per-Serving posted at Wisdom From Wenchypoo's Mental Wastebasket, saying, "This what you're looking for--frugal living stuff?" Wenchypoo presents Filling Up On Fewer Calories with Less Food—Negative Calories and Volumetrics posted at Wisdom From Wenchypoo's Mental Wastebasket, saying, "Spending less means keeping more money." Wenchypoo presents D-I-Y Health Care Reform--Help Save a Trillion Dollars Right at Home posted at Wisdom From Wenchypoo's Mental Wastebasket. Wenchypoo presents Omnibus Obama Tax Avoidance Tip Sheet and Small Loophole Collection posted at Wisdom From Wenchypoo's Mental Wastebasket. Wenchypoo presents Playing the Rations Game posted at Wisdom From Wenchypoo's Mental Wastebasket. Samir Kunvaria presents Life is meant to be abundant in all Areas posted at Samir Kunvaria, saying, "When we talk about goals we talk about achieving a target. The target can be the crossing the finish line for an athlete or passing out with flying colours for a student or achieving the top medical college for an aspiring doctor. Every individual has a different approach to achieve these goals. All goals are different and all people have different goals. Today let us talk about a few financial goals.

So what are financial goals? Any goal that needs to be achieved financially viz. goals to be achieved by paying out money, in short or long term are known as a financial goals. Let us take a few examples and discuss these financial goals. Short term goals: Goals to be achieved in less than a year are short term goals. An emergency like a family member undergoing an operation can be termed as a short term goal, as this goal requires appropriate cash in a very short period. Purchasing a motor vehicle now or marriage fixed at the end of the year or a small trip to native place can also be defined as a short term goal. To meet a short term goals you need to invest in liquid instruments like short term fixed deposits with the bank, or liquid mutual funds, or have ideal cash in your savings account. Medium term goals: Goals to be achieved after a year but before 5 years can be termed as medium term goals. Goals like purchase of a house or house renovation after 2-3 years can be termed as a medium term goal. For a self employed person, expansion of business after two years can also be considered a medium term goal. In case of purchasing a car, you can make full payment instead of opting for a loan and making payments via easy monthly instalments. This helps in minimising liabilities and over-burdening yourself with a fixed outflow each month. Medium term goals generally require a disciplined investment plan in a mix of equity and debt investments (Read asset allocation for different equity and debt investment options) that can be liquidated when required. Long term goals: Goals that are recurring in nature can be considered as long term goals. For a newly married couple, planning for child’s education and marriage expenses or for a family in their early thirties, planning for retirement living expenses can be considered as long term goals. You can invest predominantly in equity investments to achieve long term goals as equity as an asset class provides best returns over a long term horizon of 10 to 15 years. Many of us don’t realise these financial goals and fail to plan for the same. A systematic and a disciplined approach towards investing helps in achieving all financial goals."

Madeleine Begun Kane presents Loan Poem posted at Mad Kane's Humor Blog. Jena Ellis presents 30 Rules of Engagement: Who Pays for the Wedding? posted at Online Certificate Programs. Infernios The Hoarding Dragon presents The dragon?s girth-staggering difference in investing early posted at ThunderDrake, saying, "This post elaborates on the staggering (girth staggering, even) difference between starting at different age gaps. It urges readers to begin investing (or through the alter ego's word, hoarding) sooner than later. Time is perhaps one of the most crucial elements to financial independence.

I appreciate the consideration. May the ambitions of my writing fuel your carnival's success. <"3">Tony Clifton presents 11 Investment Ideas From $11 to $11,000 | High Yield Wealth Development posted at High Yield Weekly Digest, saying, "There are plenty of great investment opportunities available if you have a million dollars or more. You can buy a companies, factories, real estate, start your own medium sized business and so on. The problem for most of us is that one million is a lot of money." Thomas John Carter presents Start a Home Based Business Online - How Simple Can it Be? posted at Lee McIntyre's FREE DVD. Matt Clooney presents Long-Term Saving by Investing into the Future posted at HVAC Training. Adam presents BusinessBlog › Log In posted at BusinessBlog. MoneyNing presents Is Our Drive for Higher Income Ruining Our Culture? posted at Money Ning, saying, "As our income increases, are we losing our culture because we "outsource" everything?" BWL presents Active Vs. Passive Funds posted at Christian Personal Finance, saying, "This article looks at passive and active funds and discusses the differences between the two..." Michael Pruser presents 10 High Paying Jobs for High School Students posted at The Dough Roller, saying, "10 awesome jobs that most high-school students can find if they apply themselves." Tom Tessin presents 6 Ways to Save on Your Restaurant Meals posted at FSC Blog, saying, "6 steps that you can take right now if you're looking to save on your next meal when you head out to eat." Praveen presents CBOE Just Had Its IPO: Why I Bought The Stock posted at My Simple Trading System, saying, "A system for investing in IPOs" Case Ernsting presents The Summer Help: Jobs in the Midwest posted at FinditLocal411 Blog, saying, "Navigating your way through the tough economy of today is no easy feat. Finding new jobs is an exhausting and rigorous process. We have tips for finding your way and getting that job to tide you over through the summer months." Sean Greene presents Retirement Planning Facts The Best-Financial-Advice.com Blog posted at Retirement Planning Facts, saying, "Retirement Planning Facts" Aussie Investor presents Valemus Share Float posted at Australian Investing, saying, "The Valemus Limited initial public offering is the biggest to hit the Australian share market so far this year. And unlike some of the more speculative issues which have been promoted so far this year, the company has a real and profitable business behind it. This article discusses the details of the Valemus float from a prospective investor's standpoint." That concludes this edition. Submit your blog article to the next edition of financial independence using ourcarnival submission form.

Past posts and future hosts can be found on our blog carnival index page.

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Pay yourself first. Really?

When researching the internet for advice on personal finances, you will find advice from many people to "pay yourself first". This advice aims to support you in the process to accumulate enough capital to invest on assets. When you get paid you are meant to put away a certain percentage of your income, usually around 10%, for investment purposes.

In principal there is nothing wrong with this, nevertheless I believe that you need to evaluate your circumstances and your objectives before putting money away in a savings account.

Consider the following scenario: You have managed to get an extra $2000 when working overtime. Your cash flow is very tight and you sometimes need to either use your credit to cover day to day expenses. This has led to the accumulation of $10,000 in credit card debt over a significant period of time. You can only afford to pay the minimum payment and this situation continuously stresses you.

The question is, should you put the $2000 away in a savings account earning you 4% per annum or should you use the money to reduce your credit card debt?

If you put the money away at 4% per annum, you will get a total interest of $80.

The other option is to reduce your credit card debt. You pay 11% interest on your credit card balance. This means that at the end of the year, the $2000 will cost you $220 in interest. Therefore if you use the money to reduce your debt you will be saving $140 in one year. Therefore it makes more sense for you to pay the credit card debt than to save the money.

The difference may not be much, but in this case the longer you have the debt, the more interest you pay. This is the magic of compounding interest. In our example, the compounding interest in working against you.

You should always evaluate your options to make decisions on savings versus paying off debt or purchasing assets.

Getting rid of debt

There are 2 types of debts, good debts and bad debts.

Good debts are the ones incurred to purchase assets such as shares. It is important to mention that in this case, any dividends from the shares should be used to pay the debt.

Bad debts are the ones most people get to buy things that are not assets. Clothes, big TVs, cars, big and expensive houses, the list goes on.

Following are some simple tips to pay off bad debt:

Strive to make your payments on time
Most credit card companies will charge fees for late payments so make  sure you make your payments always on time.

Pay more than the minimum amount

Credit card companies are not interested in you paying off your credit card debt. They want you to have as much debt as possible so long as you can make your minimum payments.

The reason for it is that they want you to keep incurring interest charges so they keep on making money.

You need to pay as much as possible in order to reduce the amount of interest you pay. This is obviously conditioned in you having the cash flow to make the extra payments.

Make repayments as often as possible
In most types of loans, interest is calculated daily. In your to reduce that interest it is important that you make payments as soon as your money is available. Don't wait for the monthly statement to arrive, pay as much as possible, as often as possible.

Make payments where you are incurring the highest amount of interest

If you incur more interest charges than interest you earn on your savings account, use your savings to pay off the debt. It does not make sense to keep money away earning 4% where you are incurring a 12%, or even higher, interest on your unsecured debts.

Increase your cash flow
 
The quickest way to pay off your debt is by earning more money and using it to get rid of the debt. This is not easy, especially if you work hard during the week. You certainly don't want to spend your weekends doing some work away from your family.
 
This may be necessary until your finances are back on track.
 
The most important piece of advice is not to incur bad debt if possible. Prevention is always better than cure.

Basic Accounting Principles - The start to financial freedom

The first step towards achieving financial independence is being in control of your finances. Understanding where you are at is vital to enable you to shape your actions so that you are moving towards achieving your financial goals.


It is important to note that wealth is not measure in terms of money, it is measured in terms of time. How long can you survive without going to work

1. Income

In simple terms, income is money that goes into your pocket. There are three two types of income, passive, earned and portfolio income.

Earned income is income earned as a result of your work. You need to work to earn this income, if you get sick or are unable to work due to any reason you get no income. This is the most common type of income that most people have. This is what keeps most people poor.

Passive income is income that you get without doing anything. Once you setup the passive income sources the only thing you need to do is sit back and watch the money coming in. Nevertheless you need to work hard to setup your passive income stream. Some examples of passive income include, real estate income, dividends from shares, passive income from the internet, income from vending machines, interest you earn from investments and others.

Portfolio income is income generated from paper assets such as shares or bonds.

What you really want is to have various sources of passive and portfolio income.

2. Expenses

Expenses is simply many that goes out. Bills, interest expenses, payments for your house, car or anything that takes money from you.

3. Cash Flow

Cash flow refers to the sources of income coming in and then going out as expenses. You want to be in control of you cash flow, you need to know how much money comes in and how much goes out, you need to ensure that you are always in a positive cash flow scenario.

Cash flow is the most important aspect of your finances, without cash flow you cannot do anything, you cannot invest in building your passive income sources and even worst, negative cash flow means that you spend more than what you earn. You need to turn this around as soon as possible.

4. Budgeting

You need to take control of your expenditure to ensure that you spend less than you earn. This is called cash flow. This means that at any point in time you know how much money is coming in and how much is going out. That knowledge will enable you to take control of your finances.

If your budget shows that your income is lower than your expenses then you need to reduce your expenses or increase your income. Doing both is the best option.

In terms of reducing your expenses, take a hard look at the money going out and find places to cut. There are also many sites on the internet with useful tips on how to reduce your expenses.

Increasing your income, that is everyone's target isn't it? The most straight forward way to increase your income is to get a second job. I don't think anyone wants to do that, you work hard during the day, the last thing you want is to get a job on the weekend or at night time. This will take you away from your family, you will get tired, it can be just too hard.

Another job doesn't need to be a torture. Think about something you like, if you have a hobby or your favourite past time activity. Now think about how much you know about it. You probably know a lot. A straight forward way to make money is to use the knowledge you have and tutor people about it. You are probably thinking, how am I going to get someone that will pay for this? Well, that is a good question, a good starting point is to create a website. If you are not technology savvy you can find many templates for websites and even some free hosting. Put adds on your website (you get paid every time someone clicks on an ad on your blog. Create a community and watch people coming to your site and asking for tips. This can provide you with tutoring opportunities or some very interesting and rewarding passive income through the advertisement on your site.

Just look on the internet and you will find many ways to produce income, the key is to do something, don't sit around thinking that it is too hard or that will never work. You will never know if you don't try.

5. Assets

Asset is anything that puts money in your pocket. Think about it, do you have any assets? Assets will generate income, if you have enough income from your assets you probably have a healthy, positive, cash flow. If you don't have any assets your are fully dependent on your daily job, if that goes you are in real trouble.

One of the most big misunderstandings regarding assets is your own house. Unless you are making money from your own house, it is not an asset. You have to pay for it so it does not put money in your pocket, it takes money from you. Don't misunderstand me. I am not saying that you should not own your own house, I think you should. If you pay rent your are certainly paying someone else's mortgage. You don't want that. You want your own house. Just be clear, it is not an asset.

6. Liabilities

Liability is anything that takes money out of your pocket. Liabilities take money from you. Examples of liabilities is money owed to credit card companies, car loans, personal loans, tax.

Liabilities generate expenses that are related to those liabilities, the loan payment for example.

Your credit card debt is a liability. Credit card is the worst type of liability. It task your money even as you sleep. Every night the credit card company calculates and accrues interest on your debt, it grows as you sleep.

Debt is not always bad. Any debt you acquire to buy assets is a good thing. A debt to buy an investment property is a good debt, to generates cash flow that should pay for the mortgage and it gives you an asset.

All of these terms are not just theories, when you combine these figures and create your financial statement you start to get a picture of exactly where you are.

If all of your income is passive income and it is going out as expenses to pay your debts then you are in real trouble.

A typical scenario of a middle-class family is as follows:

• Assets - none
• Liabilities - mortgage debt, car loan, credit card balance
• Income - only earned income from day job
• Expenses - expenses going out as payments to cover your liabilities

The scenario above is unfortunately very common. If you are in this situation you need to get rid of bad debts and move on to create assets.

Take action, do your financial analysis and understand where you are at today. Use this to make decisions that will take you closer towards achieving financial independence.

The path to financial independence

If you are like me, you would like to one day be financially independent. That is a very difficult goal that only very few people are able to achieve.

The following wikipedia page has a very good definition of what it means to be financially independent. Check it out, it is worth the reading (come back here once you are done!): Definition of financial independence

This topic can keep you busy for the rest of your life. The aim of this blog is to give you a very high level summary of the various advices you can find on the web.

It is not meant to be an exhaustive and complete list, it is just a  starting point to the process of achieving financial independence.

Become financially literate

This is an absolute must. You need to have at least a basic understanding of how to manage your money.

Robert Kiosaki is always emphasizing financial education in his books. He says that cash flow is the key, so understanding how much money comes in and how much money goes out is the beggining to understanding your finances and to set yourself up to be financially secure. There is much more to financial education than just understanding cash flow.

I will blog some definitions and practical applications in the near future.

Have a financial goal.

Set yourself a goal and stick to it. Put in your mind that you can achieve anything that you want and work hard towards achieving your goal.

Write down the goal, memorise it, think about it, motivate yourself to always act towards achieving your financial goal.

An important word of warning, don't become a slave of your goal, the goal can change as your circumstances change. Your are the master of the goal, not the other way around. 

Build yourself several different sources of income

The key from this point is not to put all of your eggs in one basket, but to diversify. If one of your sources of income is not doing very well, you have other sources of income that are doing well.

Just off the top of my head I can think of the following streams of income: real estate, shares, online, allifilate marketing, ebay shops, income from online activities, tutoring (if you are tutoring is not passive income but it can help you).

Robert G. Allen has written a very good book about this topic. Refer to Multiple Streams of Income for more information about it.

Keep yourself motivated 

The path is not easy, if it was everybody would be financially independent. The point is that it is achievable with a lot of work and determination. And you should start now. Start small and keep motivated. 

Set yourself a goal and start working towards it. Take action as soon as possible, a small step is all that will take to start the journey to becoming financially independent.