How Reducing Debt Payments Can Increase Cash Flow
In business, it’s often said that cash flow keeps the doors open. Businesses need cash, however they get it, to pay the bills. Once the cash flow stops, companies go bankrupt.
The same is often true with individuals. Without cash, bills go unpaid, necessities can’t be purchased, and extras and indulgences don’t even figure into the picture.
It’s an important issue as month-to-month household income and spending fluctuate more than ever. More people are navigating the so-called “gig economy,” picking up extra work or cultivating a “side hustle” to supplement their primary income. A new study found that 41% of households are experiencing at least 30% variation in income month-to-month. 60% of households are experiencing a 30% variation in spending each month.
This puts huge stress on monthly cash flow and can make it difficult to create and adhere to a monthly budget.
What is cash flow?
Cash flow is an accounting term for how much money comes in and out of a business or personal expenses. Cash flow problems often happen when your expenses are greater than your revenue—and can lead to bankruptcy if not managed well. That’s why knowing how debt payments can impact cash flow is important for small businesses and personal, home finances. Looking to increase your cash flow or reduce overhead costs is beyond important. Cutting down on debt payments can help maximize current revenue while preparing you for future earning potential. It’s good to know that by reducing debt payments you can improve your cash flow, which will make it easier to start growing and expand your business.
For example, paying off credit card debt with high interest rates will save you money each month that could be reinvested into other areas of your company or home expenses. Paying off debt may also be one of several ways you’re able to free up capital and increase profits. You should consider consulting with a financial advisor before making any big decisions about reducing debt payments as there may be better options available to you depending on what type of business structure you have set up. Regarding cash flow and its impact, this would apply to both personal and business.
Maintaining Cash Flow with Life’s Changing Circumstances
Life is unpredictable. (That’s obvious, right?) Sometimes people stumble over unexpected expenses and find themselves facing an intimidating stack of bills. Unfortunately, this happens to a lot of people. Financial struggle is about far more than poor spending decisions; debt problems often surface after a collision of bad circumstances and limited options.
However difficult situations arise, it’s critical to figure out how you can maintain cash flow.
You’ll often hear and read about the importance of keeping a budget. A family budget is really about cash flow – how to find the cash you need to buy the things you need.
When things change in life, it requires an evaluation of your cash flow situation.
One way for improving cash flow is to reduce debt payments. Any amount paid towards your debt has a positive effect on your financial situation, as it does not require you to withdraw money from an investment portfolio or incur additional debt through interest payments. Debt repayment or consolidation can give you immediate positive results in terms of cash flow and will have long-term impacts in other areas, such as reduced interest costs, increased investment returns and more accessible credit. The best part is that even small monthly adjustments can make a big difference. Even if you reduce payments by $50 per month, over time, it will quickly add up to hundreds or thousands more dollars per year that you can put back into your business, invest or save.
How to Increase Personal Cash Flow
Your first option is to reduce expenses. When you’re spending less, you’re maintaining more of your cash flow balance. When a situation arises like a lost job or medical expense, you need to find money to replace the diminished cash flow. Cutting back on low-priority expenses is a good place to start. This usually involves eliminating cable, cutting back on the phone bill and other similar expenses. Do you really need Netflix, HBO Now, and Hulu+? Do you actually watch all 3000 channels? Probably not.
The second option is to increase income. This seems like a great idea, but it’s obviously not that simple. There are only so many opportunities and only so many hours in the day to work. However, it’s good to assess your situation and figure out if there is an opportunity to increase your income. How do you spend your free time? Is there an opportunity for you to monetize a hobby?
A lot of debt-burdened Americans are making payments toward various credit card accounts, mortgages, car loans and student loans. While it’s understandable that we have to pay our debts – after all, it’s what we owe – that doesn’t mean there aren’t ways to increase cash flow when reducing payments. By paying off certain debts first, you can not only reduce your monthly expenses but increase your cash flow so you can save money faster.
What do you do with that extra money? Depending on how much is leftover after your other bills are paid and if interest rates are still low (which they currently are), you may want to invest it in an IRA or 401k to ensure a financial safety net in case your situation changes later on down the road. Whatever you decide to do with it, though, reducing payments can help put more money in your pocket each month.
Tips for reducing debt payments
If you can pay off your high-interest debt with a low-interest loan or credit card balance transfer, you will save money in interest charges and eliminate high-interest balances quickly. To reduce payments on student loans, you can apply for a repayment plan that extends your term from 10 to 25 years. Under such a plan, your monthly payment will be about one-third lower than it would be under 10-year plans.
Also, don’t forget about federal student loan forgiveness programs if you have some time left on your repayment schedule. Cash flow is an important part of any business because it allows you to buy inventory, make payroll and cover other personal home expenses.
Other ways debt can be reduced is by reducing monthly payments through methods such as refinancing. You’ll also want to take advantage of any tax breaks offered by Uncle Sam—after all, there’s no point in paying taxes twice on income!
Reducing Debt Payments to Increase Cash Flow
The first option above also includes revisiting some of the expenses you can’t cut and finding ways to create a better fit with your current financial situation. That might include looking at your mortgage and figuring out a way to lessen your monthly payment. That usually includes extending the loan and paying more in interest in the long-term, but it can provide short-term benefit to increase your monthly cash flow.
You can often do the same with other debts like car loans, student loans, and others. It’s not always possible, but creditors will often look for ways to get as much money as they can, even if they won’t see a 100% recovery on their initial loan. They know that if you don’t have the cash flow now, they get nothing at all. Some creditors will try to get what they can now, hoping that they can get more in the long-term.
Decrease Cash Flow to Creditors with Debt Settlement
You can also look into debt reduction through a relief process called debt settlement. Settlement can help you reduce your overall cash flow to creditors by negotiating the balance of debt downward, resulting in a lower total debt that has to be repaid and much less lost to interest repayments over time.
Again, creditors know that circumstances change. They know that some people struggle with cash flow and that there is a chance that they could face a bankruptcy situation unless they work something out.
If you’re in a tough cash flow situation, debt settlement can be an option. It’s a great way to reduce the balance on some accounts while also decreasing the monthly payment amount, increasing your cash flow each month so you’re less stressed and can meet other important obligations without sacrificing your financial future.
For more information on debt settlement and how it can impact you, please visit our complete overview.