Five months after we had to adjust to life amidst the novel coronavirus, financial health has suffered as the struggle to overcome the consequences of the pandemic continue. After dropping for 15 straight weeks, by the end of July, the rate of weekly jobless claims rose again due to another surge in COVID-19 cases.
With consumer uncertainty growing week-to-week, it’s important that individuals and families focus on the things they can control. We saw that mindset play out earlier in the year, when personal savings rates jumped to historic highs of nearly 33 percent in April and leveled out to 19 percent in June. While such high savings rates are expected, this does not mean the best practices in financial health are being followed. Now is as an important time as any for your credit union members to refine their cash flow management process.
Cash flow management is a system that efficiently and effectively manages what your members do with their financial assets every month. Now, we’re not talking about those who just earn money and pay their bills. That’s not managing cash flow; that’s surviving. Cash flow management involves setting goals and understanding where their money comes from, where it goes and what choices are best for maximizing its value. Improving one’s cash flow management is not passive; it’s an active process.
Establishing a cash flow management plan is foundational to one’s personal finance success, yet it’s often the most neglected. According to Forbes, only 29 percent of Americans claimed to be in a good state of financial health, even prior to COVID-19.
Helping your credit union members set up a defined cash flow management system is key to educating them and helping them build their confidence in money management. Here are some pointers you can use to help your members establish a better system to optimize financial health:
- Identify specific sources of income
Cash flow management begins by identifying sources of income. One’s income can be derived from several areas: salary, bonuses, self-employment or investment sources. Income can be controlled, mediated, or managed to preference — i.e. taking on a side job, working longer hours, or bringing on more clients. Customers cannot allocate money properly when they don’t know what income is coming from what source.
- Create a consistent spending plan
Determine fixed expenses – in other words, those that don’t change month-to-month. Be aware of what those consistent expenses are and when they need to be paid. By understanding that, you can get a clearer picture of your cash flow. Parameters can be set up to utilize any remaining money, whether it’s passive income, paying off credit card debt, or contributing more to savings.
- List out income sources and bills to pay with a cash flow statement
Create a cash flow spreadsheet for each pay period and list what expenses or investments need to be covered in that time frame. Include everything: food, utilities, rent, insurance and financial investments. For a more detailed look, Investment Moats has a handy guide.
- Assign money following each month’s paycheck deposits
Assign the purpose of each paycheck following each pay period. For example, if the first paycheck of the month takes care of food and insurance, the second may be used to cover rent/mortgage and various financial investments. Intentional and organized spending plans are crucial to optimizing financial health.
- Automate bill payments
Any list one finds regarding cash flow management, in the era of digital banking, will include the foolproof method of automating bill payments. Setting up a monthly automated payment schedule for financial obligations ensures a healthy credit score and peace of mind.
Many Americans’ financial health is in some version of peril. Workers across the country are dealing with the uncertainty of losing a job, on furlough, or stressing about unemployment. Credit unions need to be that source of comfort those workers can go to for financial relief, and an advocate they can trust to help bridge the gap and guide them to their next employment opportunity.
Credit unions across the country can help members improve and organize their financial lives in the most efficient and streamlined manner possible. Cash flow management is a practical and effective way in which to do so. Efficient financial planning includes implementing and utilizing the mobile banking assets now available for credit unions to offer their communities. With that in mind, we invite you to sign up to watch the replay of our recent webinar “Leveraging Tech to Provide Financial Relief to Consumers,” hosted by The Financial Brand. This webinar provides insight and tips from our very own CEO, Ben Morales, on what’s being done with fintech partnerships to help financial institutions leverage fintech platforms. With these tools at their disposal, credit unions can more effectively improve the financial health of their community members. We hope you find value in the webinar!