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How to Improve Cash Flow

Cash flow is a key indicator of your financial health.

In this topic, you'll learn:

  • The definition of cash flow.
  • How to improve cash flow by increasing income and/or decreasing expenses.
  • How to use the Step-Down Principle.


Your cash flow is the difference between the total amount of money transferred into and out of your bank account. Typically calculated on a monthly basis, your cash flow is what's left over after subtracting your outgoing expenses from your income.

For example:

Income - Expenses = Cash Flow

$6,000 - $5,000 = $1,000

Cash Flow = $1,000

In this example, the cash flow is positive, meaning that more money is being earned than spent. Having a positive cash flow is what budgeting is all about - then you can save or invest the extra money as you work towards achieving your financial goals.

On the other hand, if the figures in our example were reversed, then the cash flow would be negative since more money is being spent than earned. An occasional month of negative cash flow here and there is probably nothing to worry about (that's what emergency funds are for), but a negative cash flow for month after month is a problem for anyone - once savings are spent, going into debt is the next step. 

If you do find yourself with a negative cash flow, you'll need to figure out ways to increase income and/or decrease expenses.

A few ideas to increase income could include:

  • Ask for overtime.
  • Find a second job.
  • Sell something.
  • Review your paycheck withholdings. Getting a large refund each year means too much is being withheld. But be sure to consult with an accountant before making changes.
  • If possible, take advantage of income tax programs, such as the Earned Income Tax Credit.
  • Try entrepreneurship. While not without risk and responsibilities, there may be services you could provide in your spare time.

A few ideas to decrease expenses could include:

  • Review monthly bills for places to save (unused health club memberships, magazine subscriptions, cable television).
  • Get quotes from different companies on your insurance policies.
  • Avoid recreational shopping.
  • Use the public library for books and movies.
  • Shop at less expensive stores.
  • Use a programmable thermostat.

For many more ideas, review our Money Saving Ideas topic.

The Step-Down Principle

The "step-down" principle is a great way to find, reduce, and even eliminate unnecessary expenses. The big idea is to make changes slowly and to avoid feelings of deprivation. Otherwise, it's easy to make a change for a limited time (like a New Year's resolution), but old behaviors almost always come back.

Here's how it works:

No matter what you're trying to change, you start with where you're at and slowly take a step down. Once you're comfortable on that new step, you take another step down. You keep doing this until you've reached your desired behavior.

Imagine a staircase with five steps. On the top step is the most expensive way to purchase an item. On the bottom step is the least expensive way to purchase the same item. For example, the most expensive way to purchase clothes is at an expensive retail store. The least expensive way would be at a thrift shop. On the steps in between, there are likely places (or times) where you could purchase a similar item at a lower cost - buying out of season clothes on sale, choosing a less expensive store, or shopping at a consignment shop for gently used items. 

Determine where you are on the steps and take one step down at a time so you don't feel deprived.

This principle also works with spending frequency. For example, if you buy lunch every day at work, you could take one step down and try bringing your lunch one day per week. Once you're comfortable with that, try bringing your lunch two days per week. 

With a little creativity, you can likely find many applications of the Step-Down Principle in your everyday spending.

Emergency Fund

Credit Card Repayment

About First Service Federal Credit Union

First Service is open to everyone who lives, works, worships or attends school in Franklin, Delaware, Fairfield, Licking, Madison, Morrow, Pickaway, or Union County! You can open your account with as little as $5. Simply visit any of our branch locations during regular business hours to join or open your account online. It's that easy!

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