Something I’ve been thinking about lately is how important cash flow is. My spending plan amount has remained relatively fixed over the last year or so, but my income increased by about $1,000 net with my raise earlier this year, which means that I went from saving about $1,000 per month after 401(k) contributions to about $2,000 per month.
What does having $2,000 per month in extra cash flow allow?
- Snowballing goals happens quickly. It would take under 3 months to max out my Roth IRA for the year.
- I could throw $2,000/month at the mortgage principal from now on, which would lower the amortization from today’s 26 years, 4 months to 8 years even. That doesn’t include already expected or future bonuses or future raises.
- If I spend down my auto insurance deductible account, I can re-pay it on pay day.
- An emergency can happen that costs about $2,000 without decreasing my net worth overall.
- I can cover large expenses like vacations or a hypothetical wedding without really worrying about the bottom line.
- It would take me under a year to save up for a car that costs the same amount as what mine did (~$20k).
FMF calls this concept “the gap”.
How did I get here? I kept my expenses well below my income when I first started working, so that when I bought a car (adding car insurance, gas, and parking costs to the budget), I still had savings room. Then when rent went up, I still had savings room. And when my income went up, I had even more savings room.
Extra cash flow is why I don’t really talk about my budget on here because I know that everything will work out fine. Sure, some days I spend a lot, but I also save a ton.
In December of last year, just like I did the previous year, I predicted what I thought my net worth would look like at the end of 2012. I predicted it would be about $183,500. I surpassed that number in July and as of October, my net worth was $197,400, putting me about $14,000 ahead of that original estimate with two months to go for the year. There’s no way that I would have guessed back in December that I could be this close to a net worth of $200,000. After buying the condo, I made a five year payoff plan, which required the end-of-year balance for 2012 to be at most $263,769.89. But as of October, I had already made enough extra principal payments to reach that goal.
I definitely make a conscious effort to save, but it really feels like my income is the primary pusher here. As my income goes up, I save more. I save all my bonuses, so if those are larger than expected, that’s more savings there too. That makes it feel like there is no point in setting goals since an unexpected income increase could propel my savings far higher than I could have anticipated when I set goals.
Extra monthly cash flow is one of the most powerful things in my financial setup. I highly recommend striving for that if you can because it definitely reduces stress.