Popular personal finance blogs and practical sense advocate for you to make more cash than lose cash in the last 30 days. If you spend more than what you bring in, there needs to be something that makes up that gap (like debt), otherwise your funds will dwindle. I wholeheartedly agree that over the long term to be sustainable, that needs to happen. However, I lose cash more months out of the year than not. Losing cash is not always a bad proposition, depending on the circumstances.
I Purposely Lose Cash Almost Every Month
First, I am a huge advocate of budgeting. I’m obsessed with how I can minimize my expenses and look over it weekly. Below is a crude outline of my budget without getting largely into the specifics that outlines how I lose cash each month.
As you can see from above, on a typical 2 pay period month (the income number is a little misleading because I just took my last period’s paycheck and multiplied by 2, which isn’t a yearly number), I lose cash. I contribute 50% of my income into my 401k. The other 50% goes to those respective categories with a few variations in between.
I consistently lose cash every month in 2-pay period months. If this goes on forever, I’m surely setting myself up for failure. What gives, aren’t I a big personal finance fanatic?! I sure am, let me explain!
Strategic 401k Contribution
I don’t consider my 401k to be cash at all, which is why I subtract the 401k number from my monthly cash inflow number. This is what’s driving my cash flow to be negative every month. I automatically contribute 50% of my income into it. It would make sense to lower my contribution by $60 a month to balance my cash flow out to at least be even, right? Not as of right now.
Currently, I’m working in Alabama that has a state and city income tax. Therefore, it makes sense to lower my taxable income as much as possible while I’m working in Alabama. I’m trying hard to move back to my home state (Texas) where state income taxes don’t exist. Neither does grocery taxes (I was shocked when Alabama charged me an extra 10% for my food costs).
Texas cost of living is higher but that’s mainly only on housing. I can do some research to get a good apartment at a price that is equivalent to what I’m currently paying plus the income tax savings I would realize.
Therefore, I could save money by moving to Texas because there are no grocery taxes, lower taxes from 10% to 8.25%, and quite possibly a raise for “living adjustment'” (I’m not counting on this, though).
Furthermore, I started work mid-year. I have to catch up to the 6.5 months of not contributing to my 401k. I’m currently sitting at a 6.5k 401k balance and I won’t be able to max it out to the limit ($18,000) with my current contribution rate. However, I’m trying the best I can to do so, which is why I’m fine with a short-term cash crunch. Next year, I will lower my 401k contribution to be around 30%.
Emergency Funds Will Keep Me Afloat
Currently, my bank account balance is at $2,500. If I were to keep up with my current rate of savings and spending, that money will allow me to live on for another 41 months. ($2500/$60). I can also cover unexpected expenses as well because my after-tax brokerage account has a healthy multi-5 figure balance. I will withdraw funds if unexpected yet necessary expenses come up.
However, I don’t expect to have to withdraw from my account because:
* 3 paycheck months exist. My negative cash flow will only happen certain months out of the year. During 3 paycheck months, I will turn back into the positive cash flow territory where rainbows and unicorns are there for me.
* 50% 401k contribution will only apply this year. I can’t contribute 50% of my income next year because I will be well over the $18,000 contribution limit (fingers crossed that it will go up to $18,500). With a salary of around $54300, 50% contribution will be well over the limit (about $9,150 over in fact). I will be lowering my contribution rate in a year’s time.
* I have wiggle room to cut expenses. There’s the most opportunity to cut my food and miscellaneous expenses. For the past 3 months, I averaged about $120 a month for miscellaneous expenses and about $185 a month for grocery expenses. That’s an extra $55 a month in opportunity that I can realize. I don’t change my budget for them though because I want to put in a margin of safety.
Why I’m not worried about losing cash every month is that it’s only temporary. Furthermore, I have an ample cash balance that can keep me afloat during the temporary period. I consider myself to have a high savings rate, which is what makes me bleed cash every month. However, it will be worth it 3 months from now (2017 is when my 401k contribution will be lower).
Countless personal finance coaches, bloggers, and fanatics (including me) advocate for positive cash flow. I wanted to share an instance where it’s OK to lose cash every month. As long as the negative cash flow isn’t permanent, it could be a smart move.
Finding the right reasons to do so is key. I save quite a few dollars on taxes by contributing so much of my salary to my 401k. My emergency fund will be enough to cover my negative cash flow over the long term. I’m practicing the short-term loss for long-term gain that is largely advocated.
Readers, would you be fine if you lose cash month over month? What are your strategies to keep your cash flow positive? Let me know in the comments below!
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