🔄 Cashflow Timing Problems

Irregular Income (Contractors, Freelancers)

The Problem:

• Income varies month to month
• Some months $15,000, some months $5,000
• Annual total adequate ($120,000/year = $10k/month average)
• But expenses regular $6,500/month

What Happens:

• Good month: $15k in, $6.5k out = +$8.5k surplus
• Lean month: $5k in, $6.5k out = -$1.5k deficit
• Without buffer, deficit months create crisis
• Use credit card, overdraft, stress

Solution: Income Smoothing Account

• ALL income deposits into smoothing account
• Transfer FIXED amount monthly to main account (say $8,000)
• Main account receives steady $8k regardless of actual income
• Smoothing account buffer absorbs variation
• Good months build buffer, lean months draw on buffer

Irregular Expenses (Annual Bills)

The Problem:

• Monthly expenses: $4,500 (manageable)
• Income: $6,000/month ($72k year)
• Should have $1,500/month surplus
• But certain months get hit with:
• January: Rates $2,400 + school costs $800
• July: Car insurance $1,200 + WOF/rego $300
• October: House insurance $1,800
• These months go into deficit despite adequate annual income

Solution: Monthly Allocation for Irregulars

• Calculate total annual irregular expenses
• Rates $2,400 + Insurance $3,000 + Car $1,500 + School $1,200 = $8,100
• Divide by 12 months = $675/month
• Set aside $675 monthly into separate account
• When irregular expense arrives, pay from this account
• Spreads cost evenly, prevents monthly cashflow shocks

📊 Real NZ Scenarios

Scenario 1: Sarah – Salaried Worker with Irregular Expenses

Situation:

• Income: $5,500/month after tax (stable)
• Regular expenses: $4,200/month (rent, groceries, utilities, petrol)
• Monthly surplus: $1,300 (seems comfortable)

The Problem:

• Certain months destroyed by irregular expenses:
• January: Car registration $380 + insurance $900 = $1,280
• April: Rates $600
• June: Dentist $400
• October: Car service $450
• December: Christmas $800
• Total irregulars: $3,830/year = $319/month if spread

What Was Happening:

• Most months: save $1,300
• January: expenses $5,480, income $5,500 = $20 left
• Savings from previous months wiped out
• Never got ahead despite adequate income

Solution Implemented:

• Calculated $319/month needed for irregulars
• Set up separate "irregular expenses" account
• Auto-transfer $320/month into this account
• When irregular expense arrives, pay from this account
• Main budget now: $4,200 regular + $320 irregular = $4,520
• Surplus: $980/month (now sustainable)

Scenario 2: James – Contractor with Irregular Income

Situation:

• Annual income: $120,000 ($10k/month average)
• Partner income: $26,400 ($2,200/month stable)
• Combined: $146,400/year = $12,200/month average
• Expenses: $6,550/month
• Should be very comfortable with $5,650/month surplus

The Problem:

• James' contracting income wildly irregular:
• Good months: $15,000
• Lean months: $5,000
• Average $10k but never know which month will be which

Cashflow Crisis:

• Lean month: $5k (James) + $2.2k (partner) = $7,200 income
• Regular expenses: $6,550
• Buffer: only $650
• Then irregular expense hits (rates $2,400 or car repairs $1,200)
• Deficit = use credit card, stress, cycle continues

Solution: Income Smoothing

• Set up separate "income smoothing" account
• ALL of James' contracting income deposits here
• Transfer fixed $8,000/month to main account
• Partner's $2,200 goes directly to main account
• Main account receives $10,200/month (stable)
• Expenses $6,550 = $3,650 surplus (sustainable)
• Smoothing account absorbs variation:
• Good month: $15k in, $8k out = +$7k builds buffer
• Lean month: $5k in, $8k out = -$3k draws on buffer
• Over time, buffer stabilizes around 3-4 months expenses

✅ Cashflow Management Checklist

Diagnose Your Cashflow Situation:

• ☐ Do you have positive cashflow most months or struggling monthly?
• ☐ Is your income regular (salary) or irregular (contracting/business)?
• ☐ Are your expenses regular or irregular (large annual bills)?
• ☐ Do you use credit card/overdraft regularly to cover gaps?
• ☐ Calculate: Annual income ÷ 12 = monthly average. Is this adequate for expenses?

If Income Irregular:

• ☐ Set up income smoothing account
• ☐ Calculate monthly average income (annual ÷ 12)
• ☐ Transfer this fixed amount monthly to main account
• ☐ Build buffer in smoothing account (target 3-4 months expenses)
• ☐ Good months build buffer, lean months draw on it

If Expenses Irregular:

• ☐ List all annual irregular expenses:
• Rates: $______
• Insurance (house, car, contents): $______
• Vehicle (rego, WOF, service): $______
• School costs: $______
• Other predictable irregulars: $______
• Total: $______
• ☐ Divide total by 12 = $______ per month
• ☐ Set up separate "irregular expenses" account
• ☐ Auto-transfer this amount monthly
• ☐ Pay irregulars from this account when they arrive

General Cashflow Health:

• ☐ Maintain cash buffer: 1-3 months expenses in main account
• ☐ Separate accounts for different purposes (main, smoothing, irregulars, savings)
• ☐ Track actual cashflow weekly/monthly (not just budget)
• ☐ If cashflow consistently negative despite adequate income:
• Problem is timing (irregular income/expenses)
• NOT insufficient income
• Solution: smoothing and allocation, not earning more

Warning Signs You Have Cashflow (Not Income) Problem:

• ☐ Annual income adequate but monthly struggles
• ☐ "Good months" vs "panic months" with same income
• ☐ Regularly using credit card to cover gaps
• ☐ Paying bills late waiting for money to arrive
• ☐ Can't explain where money goes despite tracking
• ☐ Profitable on paper but always short on cash

Remember:

• ✓ Cashflow pays bills, profit doesn't
• ✓ Timing of money matters more than annual total
• ✓ Irregular income + regular expenses = cashflow crisis
• ✓ Regular income + irregular expenses = cashflow crisis
• ✓ Solution: smoothing and allocation, not more income