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Tuesday, 05 February 2013 19:32

Why Cash is Prince and Cashflow is King: Business Lessons for Your Children

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There was a time when most college students had to ration their pocket-money carefully to have enough for an ice cream soda or a movie on the weekend. When I was in college, I had a bottle where I dropped pennies every day, and once or twice a year I’d have enough for a dinner at a nice restaurant. Today’s students are bombarded with offers for credit cards as soon as they arrive on campus. Many are saddled with burdensome credit card debt at ridiculous interest rates in addition to their student loans. Before these kids figure out what credit is for, they’ve ruined it.

Business people know that anyone can run a company without profit, but no one can run a company without cash. The same applies to life. We’ve all heard the cliché “Cash is king.” I actually believe and teach that “Cash is prince,” because “Cash flow is king.”

Many young people fail to manage their cash flow properly and run out of money before the next paycheck, unable to meet their financial obligations. They miss credit card payments, car loan payments, or, worse, student loan payments. Soon threatening letters and phone calls begin, and inevitably collection notices and derogatory statements on their credit report weigh down their credit score. In some cases, young adults before the age of 30 file for personal bankruptcy and then spend a good part of their lives rehabilitating their credit. More important, prospective employers, landlords, and other credit issuers routinely check the credit score before offering employment or approving an apartment lease.

Here is the problem most young kids run into. An amount of money goes to their bank account every week or every two weeks. They pay whatever bills are due at the time, and see a significant surplus remaining in the account. Most treat it as extra spending money and do exactly that. They spend it. This is the ultimate in a false sense of security, because while they think that the “surplus” is spending money, it is actually money that must be used to pay bills that come due later in the month. Inevitably, when that time comes they are short of cash.

money-jars-how-to-teach-kids-about-money-250x250 To prevent this from happening to my daughter, I taught her the following simple principles for managing her cash flow.

1. Create a realistic budget and stick to it.

2. Set up multiple bank accounts with online access and link them together.

3. Pay yourself weekly or biweekly. Wherever your money comes from, your employer, your parents or a school loan, deposit your check in one of the online bank accounts; let’s call it the master bank account.

4. Transfer 10% of your income from the master to a savings account.

5. Transfer the money intended to pay bills to a bill-paying account. Immediately transfer the equivalent of two weeks of expenses to this account.

For example, your rent is most probably due on the first of each month. If you are paid biweekly, transfer half the rent from the master account to the bill-paying account, and do the same with all your bills such as utilities, food, credit card payments, etc. If you are paid weekly, transfer a quarter of your monthly expenses to that account.

6. Pay all your bills by credit card whenever possible. Doing so causes you to write fewer checks and makes record-keeping simple and centralized.

7. Pay all your bills online. Program your accounts to automatically issue payments two days before the bills are due. This helps you in two very important ways:

a. Your bills are always paid on time, and that is the most important ingredient for a good credit score.

b. You avoid making the cardinal mistake of overspending and running short or “bouncing” a check.

Consider this all too familiar example: You have paid your bills with physical (paper) checks and mailed them to the intended payees on time and you feel good about it. The next day you check your account balance and discover that you have more money than you anticipated. To reward yourself, you decide to spend it on things you enjoy. A few days later the bank calls you with an “insufficient funds” message.

How could this happen? Here is how. When you pay by paper check, the money stays in your account until the check clears the bank, which, counting transit time and other factors, could take from a few days to a few weeks. Online bill payment removes the money from your account on the same day the check is issued, thus eliminating any unpleasant surprises. It is fast, secure, and automatic. It also saves you money because while many banks charge you for writing checks, most banks offer online bill payment for free.

8. Pay your credit card bills weekly. Programming your account to pay a quarter of your credit card bill each week reduces the finance charges assessed by the banks if you carry over balances from month to month. More important, you eliminate any risk of a late payment, and your credit score rises.

9. After you have followed steps 3 through 5, you should still have the money you budgeted for entertainment and the like.

10. Withdraw the full amount in cash. Use only cash for drinks with friends, dinners out, movies, etc. This is your safety valve. You can order only as many drinks as you have cash to pay for.

Keep the credit card in your wallet and you will have no unpleasant surprises.

While saving money is important, establishing good credit is even more important. When my daughter was in high school, I got a joint credit card, which she shared with me. Initially I maintained control, and later supervised how she used it. As you might expect, she made some mistakes. When mismanagement or overspending was evident, I’d e-mail her a copy of the statement and ask her to justify specific expenses. Those were not happy days for her, but they provided a forum for accountability, discussion and education.

Knowingly or not, the entire time she was learning to control her spending, manage her cash flow, and establish some savings. Most important, she was also establishing credit. Persephone secured a full-time job before graduation, and a month later she asked to be cut off from any support on my part so that she could make herself financially independent. Soon thereafter, she was approved for an apartment lease within a day, and was told the expedited approval was due to her credit score. A few weeks later, she was able to get a very nice car for herself entirely on her own creditworthiness. The following month she joined the ranks of American Express cardholders. Watching my daughter’s ability to do these things as a young lady let me know that she was well on her way to independence.

This is my opinion.  It worked for me and it can work for you.  You just have to try it!

Chris Efessiou

About Chris Efessiou:  Chris Efessiou is an entrepreneur, business leader, educator, mentor, international speaker, radio show host, and best-selling author of CDO Chief Daddy Officer: The Business of Fatherhood  based on his own experience from raising his daughter as a single dad by applying his business knowledge to the business of parenting.  Listen to Chris’s weekly Radio Show Straight Up With Chris:  Real Talk on Business and Parenthood on Voice America Radio.  You may connect with Chris on Facebook, follow on Twitter and visit www.ChrisEfessiou.com

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