Are You in a Cash Flow Drought?

July 11, 2014

Living on the East Coast but working for a California based company, I get to hear about things that are newsworthy on both coasts. One of the more recent news items that I talked about with my CA coworkers was the drought that they are currently experiencing.  This article talks about the drought and what it has done to the price of water in California.

Not surprisingly, in times of scarcity, prices rise…often drastically. That goes back to basic econ 101 supply and demand principles. I’m not writing this to suggest that you get into the water-selling business in California (although that doesn’t sound like such a bad idea right about now!) but to maybe get you to connect the dots with your own personal budget and the laws of supply and demand.

I thought of this because of a person I met with last week.  He was talking about life after divorce and said that in his married life, cash flow was easy.  They had two incomes and bought pretty much whatever they wanted, within reason.  Life, at least financially, was good.

Fast forward to now and he is paying child support, alimony and his own household expenses.  That greatly reduces his available cash flow and he made the comment that he feels like he has been living in a cash flow drought lately.  Where once his financial life seemed like it was all “feast,” he’s now experiencing “famine.”

This has caused him to take a serious look at his personal finances and change some things.  Where once his supply of money was strong and his demands (his personal “wants”) on those dollars were relatively minor, he had ample cash flow to save a substantial amount of money each month.  Over the last few months, he has been depleting his savings because of the cash flow drought.  He knows that if this pattern continues, he will deplete his savings and start to rack up debt, which could be devastating to his long term goals.

He is looking for ways to make the drought end and we talked about both sides of the cash flow equation. We first looked at his expenses to see what could be reduced and he found a few areas that he eventually saw as “non essential.” (Why hasn’t Congress ever thought of this approach?) He will reduce those expenses in the near term to reduce the outflow of cash in his budget. They won’t change his life drastically but he now is looking at every expense item to gauge their importance and if there is a way to reduce the expense.

His priorities are changing as his budget is changing.  Now that his supply of money is tighter, and the demands on his budget are high, recalibrating expenses is critical.  Creating a budget isn’t a one time event. It’s an ongoing process and subject to change, just like the rest of life.

The other side of the equation is one that most people don’t think about a lot. It’s the revenue side. He has a full time job and gets paid well enough that he has never considered any other source of income as being needed.

But now that he doesn’t have a second income in the household and his expenses are high with his child support, alimony and normal household expenses, he is giving that thought serious consideration. He has a friend that owns a restaurant and is going to talk about being a bartender on the weekends or maybe one night during the week. His kids are older and out of the house now so he has free time now that he didn’t have when they were younger. He is committed to making this work.

If you feel like your budget has hit drought-level conditions, you can do the same things that he is doing. Look at your expenses, every single one of them, to determine if they are absolutely essential, a “nice to have but not necessary” or impulsive/frivolous.  Pare down your expense level and at the same time, remember that the budget equation has the revenue side as well. If you can reduce expenses a bit while increasing your income, it’s almost like a double win or making twice the progress. It is not only possible but incredibly likely that if you feel like you are losing ground and falling behind now, by looking at both sides of your personal finances and making tough choices, you will find yourself in a much better position in a relatively short period of time.