Don’t Forget the Importance of Cash Flow in Household Finances

With so many Americans struggling to get by in this sluggish economy, many households continue to struggle with significant debt. So many people feel as if they are drowning in their monthly payments and are not sure what to do. The Internet is saturated with personal finance articles advocating various ways to help people survive. Many financial experts advocate paying off high interest debts as a household priority, and this is often sound advice. It is, however, not always the best advice.

Living paycheck to paycheck with barely enough money to cover monthly bills, families can become discouraged leaving a great sense of despair. Often, there is little that can be done immediately when a family finds itself cash flow poor. However, sometimes families find themselves with some balance of money that they need to decide how to spend. This might come from a tax return, the sale of an asset, or severance pay. When this happens, people need to look at both their monthly payments and the interest rate they are charged.

Paying off a debt with a lower interest rate is often the best choice when it frees up significant monthly cash flow, but especially for a family living paycheck to paycheck.

Perhaps a family finds itself with the following bills:

Credit Card 1 – $2500 balance, 14.9% interest rate, $75 monthly payment Credit Card 2 – $2500 balance, 12.9% interest rate, $50 monthly payment Car Payment – $2500 balance, 6.9% interest rate, $400 monthly payment

If the goal were simply to pay as little interest as possible, or if the family had extra money each month and wasn’t living paycheck to paycheck, the best approach might be to pay off the 14.9% interest rate credit card with a monthly payment of $75. However, when a family is struggling with monthly payments, often the best thing to do is pay off balances that free up significant monthly cash flow. In this situation, paying off the car is the best way to go. That $400 a month gives the family a little breathing room and could help reduce some of the daily stress that exists with living paycheck to paycheck. And, while the car is likely to be paid off in 7 or 8 months anyway, that is still a significant length of time to have to continue living with so little extra money each month.

Anytime a family finds itself with some surplus of money, it should be careful not to overlook strategies that increase its cash flow. Adequate cash flow, whether in a business or a household, is often what makes the difference between success or failure.


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