If you’re interested in personal finance, ask yourself why that is so. What you discover will open your eyes to your money mindset. Over the years, to my chagrin, I’ve discovered that not everyone is interested in financial planning. Why is that?
Professional speaker and philosopher Dr John F. Demartini teaches that ‘voids drive values’. Imagine we’re in a sealed room from which all the air is being sucked out! As the air grows thinner, and as we find it harder to breathe, the less we will think about anything at all other than forcing oxygen into our labouring lungs. You get my drift.
So since the voids in our lives drive or perhaps even fuel our values or priorities, I believe those among us who are deeply interested in personal finance have had episodes and experiences of deep economic duress and tight financial constraints. Such proactive individuals, I find, are keen on harnessing the powerful and holistic financial planning process to give their families a brighter future.
Since you chose to start reading this column and are still with me, I believe you wish to improve your finances, too. Therefore, I sincerely recommend you first focus on better understanding the two foundational financial statements that form the bedrock of the wealth accumulation dimension of financial planning: Your net worth statement and your cash flow statement.
You may construct both of them with just a pen, some paper and a basic calculator or, better yet, on your computer in an Excel spreadsheet. For your net worth statement, pick a date, like today, and then list the individual current values of all your assets and liabilities, what you own in the world and what you owe to the world! The total value of your assets minus your total liabilities is your net worth. It might be positive, exactly zero (which is unlikely), or negative.
As for your cash flow statement, select a practical period for analysis, such as one calendar month at a time. Then list all your regular sources of cash – both active (like your salary or business income from work) and passive (in the form of interest, rental, distributions from unit trusts, and dividends from stocks) – throughout your chosen period. Total your monthly cash inflows; then, below that, list all your cash outflow line items such as mortgage or rent, car payments, essential personal and family expenses, and discretionary expenses. Add up all those outflows.
The total of your cash inflows minus the total of your cash outflows is your cash flow surplus, which is good, or your cash flow deficit, which is a problem. Obviously the best position to be in is to have both a positive net worth and a positive cash flow balance, meaning a cash flow surplus.
But even if your net worth is negative because you owe the world more than you own in it, take heart! If you also currently have a cash flow surplus, then you have the means to rehabilitate your weak net worth position.
If your cash flow position is negative, however, you must be very, very careful because you’re on the road to financial oblivion regardless of whether your net worth is positive or negative now because with each passing month you will grow poorer.
To avert that sad fate, you must wrest back control of the financial steering wheel of your life and swerve off that wide, easy highway to oblivion and get onto the narrower road less travelled.
Practical steps to take
1.Look at the asset side of your net worth statement (NWS). Sell off any assets, like an unused second or third car or a piece of so-called investment property you haven’t been able to rent out for ages. Your goal is to raise extra cash for intelligent redeployment.
2.Use that extra cash to either pay down or pay off expensive debts on the liability side of your NWS, or buy productive savings and investments that will grow over time, either through capital gains or, better yet, through regular passive income inflows.
3.If your net cash flow position in your cash flow statement (CFS) is negative, you MUST do everything within your control to stem that cash bleed! If you don’t succeed, the haemorrhaging will lead to your financial demise as surely as an unhindered arterial gusher will cause physical death. To do so, you could choose to stop overspending. You might also work on improving any under-earning facets of your career. (For guidance on both cash flow improving initiatives, read my Dec 16 and 23 columns, which you may access at www.nst.com.my/authors/rajen-devadason).
4.Finally, if your net cash flow position is positive, congratulations! You’re in the best shape of all to set sail for a bright horizon. To hasten your progress, raise both your active and passive cash inflows, and at least temporarily reduce your cash outflows through delayed gratification.
As 2018 winds down, I hope you use my four recommended steps to set New Year Resolutions you care about! Next week we will focus on building and analysing your asset base for snowballing gains.
I wish you an exciting New Year 2019 filled with God’s richest blessings on you and yours.
© 2018 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com You may follow him on Twitter @RajenDevadason