The Cash Flow Cup

The Way of the Cup

You should think of your checking account as a paper cup. Cash from your job, employee reimbursals, flexible spending plan reimbursals, eBay sales, etc, pour into the top of the cup.

But the cup has a hole in the bottom. Money flows out the hole as you make payments for your mortgage or rent, auto loan, credit card purchases, utilities, eBay purchases, etc.

So cash pours into your cup, accumulates, and runs out the hole in the bottom. If cash pours into the cup faster than it runs out, the level of cash in your cup rises; this is good. If cash runs out the hole faster than it pours into it, the level of cash in your cup falls; this is bad.

Where is This Going?

You may think this is leading to the topic of reducing the size of the hole in the cup; cutting back on your spending to stem the flow of cash from your cup. That's definitely a good idea, but not the idea that I want to convey via the Cash Flow Cup

Instead, I am interested in the rate of flow into and out of the cup: you want cash to flow into the cup fast, and you want it to slowly dribble out of the cup.

Why? Your checking account earns interest. A small amount, it is true, but this idea applies to all your other accounts as well, such as your money market account, which earns a higher rate of interest than your checking account.

You should apply the Cash Flow Cup principle to all your accounts. The idea here is to maximize every opportunity to build your wealth. The more money in your account, the more interest it will earn. And interest begets interest, and that is good.

Speed the Flow into the Cup

For example, nowadays, direct paycheck deposit is very common, and some employers require you to use it. But a few years ago it was more common for employers to hand out paper checks that had to be taken to the bank. When direct deposit was introduced most people (myself included) signed up.

But, there were several die-hard types that insisted on receiving those paper checks and driving them to the bank. They didn't trust direct deposit, even though the deposits were fast and automatic, and helped speed the flow of cash into their cups.

Similarly, do you find that checks from insurance or employee reimbursals pile up on your desk? That money isn't earning interest until it gets into your cup, so deposit those checks right away and speed those funds into your cup!

Slow the Flow out of the Cup

Many people like to pay bills the instant they arrive. They don't like the nagging feeling of having a bill to pay, and they don't want to miss the due date. But you typically have 30 days or so before the bill is due; to pay a bill long before it is due unnecessarily increases the cash flow out of your cup. You want to hold onto that money as long as possible before letting it go, maximizing the amount of time that money is earning interest.

The solution is easy if you use Quicken or other personal finance software that supports electronic payments: pay that bill right away if you must, but schedule the payment date to be a few days before the due date (to allow time for the payment to arrive).

What if you don't use electronic bill payment? The solution is just as simple: again, pay that bill immediately if you must, but don't mail it immediately. Instead, put a Post-it note on the envelope that instructs you to mail the bill with enough lead time (say, 5 business days) to arrive by the due date: "Mail on Friday March 16". Now place that envelope on the shelf or table or in your briefcase, wherever you put outgoing mail. Review the pile of envelopes each day, and drop each into the mailbox on the appropriate day (remove the Post-it first!)

The Cup is Your Friend

Think about the Cash Flow Cup always as you go about your everyday finances. Get that cash in fast, and be stingy about letting go of it. Make your cup runneth over, rather than run dry.