CONSIDER this:
Both in business and in our personal financial life, cash flow is crucial. Thankfully, understanding the one principle and four purposes of healthy cash flow management is simple.
First, the one principle: Ensure more cash flows into your life than flows out of it.
Committing to this super-principle will create a consistent cash flow surplus — your key to undeniable financial success. As you mull over that, I would like you to take a figurative step back first to get a better view of the vast vista of economic success we all covet.
In business, we need sales to generate cash inflows. In life, regardless of whether we are an employer or employee, we need to "sell ourselves" effectively first before we can sell a product for revenue or our time for a salary.
We're all in sales. (I have written more extensively on this truth here: www.nst.com.my/lifestyle/sunday-vibes/2024/01/998098/money-thoughts-sell...)
Author and professional speaking legend Brian Tracy says: "The lifeblood of a business is sales and cash flow."
Regardless of what we do to generate a healthy cash flow for ourselves, this is undeniable: successful people are cash-flow positive. So, let's take a deep dive into the super-principle of cash flow planning, and the four purposes for managing our cash flow:
ONE SUPER-PRINCIPLE
Ensure more cash flows into your life than flows out of it.
The reason this is the foundational principle of financial health is simple. If we get this part of our personal finance equation right, then everything else falls into place. That allows us to sleep well at night knowing we have our hands firmly on the steering wheel of our economic life.
But if we don't ensure more cash flows into our life than flows out, we will grow financially weaker and weaker over time.
How do we ensure we generate consistent cash flow surpluses? Initially, by working hard — and later in our career by working smart — to earn a healthy active income; and by exercising delayed gratification to curb our expenses in a prudent, sensible manner.
Both parts of that cash flow equation must be heeded for financial success. Focusing on just one isn't enough.
FOUR PURPOSES FOR MANAGING CASH FLOW WELL
1. Extract maximum delight from the money we spend
Why bother exercising delayed gratification over the long haul if we don't enjoy the journey over the remaining decades of our lives?
None of us can "have it all". We are constrained by our finite capacity to earn money by trading our skills for it, and by the limited time we have during our prime working years. So, choices must be made.
Yet, we need to have fun along the way, otherwise what's the point? None of us aspires to tolerate existence; we crave to savour life. Therefore, we should choose wisely what we spend our limited supply of cash on.
2. Build a sufficiently large — yet not too large — cushion or cash reserve as our EBF, or emergency buffer fund
Occasionally life hurls spanners into the cogs of our life. Emergencies arise like illnesses, accidents, and other personal crises. So, use your cash flow surplus to first build up an EBF of appropriate size.
For most individuals, I recommend a buffer of between three and 12 months' normal expenses. For most businesses, I suggest a separate EBF of between 12 and 24 months.
Build these EBFs slowly; and consistently enlarge them over time until your targets are met. Then you should stop and focus on following two purposes.
3. Save and invest all of the subsequent positive cash flow to build assets that compound steadily
After you've built up your targeted EBF or EBFs to a minimum of two months' expenses, then slow down the allocation of excess cash flow toward EBF-buildup, and also channel money to savings and investments.
The goal of building a portfolio of savings and investments is to generate both long-term capital gains and, as we age, current passive income. We want our money to work for us, so we don't have to work for it all our lives.
A perfect retirement can be described as the latter period of life when our money works well and hard for us so that we no longer have to.
4. Pay down and later eliminate all debts
The compounding effects of debts will make us poorer over time unless we take charge of their elimination.
After the EBF minimum targets of two months' expenses are reached, and a modest start is made on creating a savings and investment portfolio, harness sound strategies to accelerate paying off one debt at a time.
It is possible to embark on this multi-part journey on your own. But most busy people will find working with a trusted licensed financial planner helpful. Also, building a supporting satellite system of trusted bankers, investment advisors, insurance agents, estate planners, accountants and lawyers is beneficial.
This process of assembling your team may take years. So, ensure you begin your journey by first heeding and internalising that super-principle of cash flow management.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-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 also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).