Cash Flow Management

Without a cash management plan, there is usually very little surplus income; and, without surplus income, there is no opportunity to make the investments that create passive income. That is a simple truth that wealthy people know very well.

Time and again I see high earners, who should be laying the financial foundations for a very comfortable future, fritter away opportunities for investment through lack of a cash-flow management system.Others earning a moderate salary, but who stick to a financial plan, wisely build their investment portfolios over time and generate the passive income that will become their retirement nest egg.

How many generally wealthy people do you see driving flashy sports cars?

In Thomas J. Stanley and William D. Danko’s book The Millionaire Next Door, they profiled wealthy US households. They found that millionaires do not lead extravagant lifestyles with luxury goods and ultra-expensive cars. Instead, they make sound investments that earn passive income for the household.

It’s no big secret that spending money on frills and spills is going to harm your prospects of wealth generation, but we live in a society where people are encouraged to buy more stuff through persistent and persuasive marketing. This can create high expenses, which is the enemy of building strong assets.

For example, home improvements can be a smart investment move, if it’s done to increase rental income or the sale value of a home. But if it’s done just to keep up with the neighbours, then it’s wasted cash that could be earning you income elsewhere. William Corbett said this:

Australians in general have never been in a better position to build wealth, but many remain stuck in an “earn big – spend big” mindset.

If you are happy to remain “income affluent”, as Stanley and Danko term high salary earners who do little with their money, then keep doing what you’re doing. But bear in mind that the job that pays that high salary may not always be there.

If you aim to become “balance sheet affluent”, as they call those who generate actual wealth, then you need to stop allowing that cash to slip through your fingers. Devise and stick to a cash management plan that you draw up with a financial advisor’s assistance.

The end goal is your future financial independence, so that you don’t have to slave away in later life to make ends meet.  You want to live the life you dreamed of and, no matter how much you earn, the foundation for achieving that is taking control of your finances now.

Bear in mind that the longer you wait to put a plan in place, the further you are away from the goal. Centralising all your cash-flow through one system allows complete oversight of your finances; it identifies surpluses that can be used for shares, property investments or other assets that can grow over time and add passive income streams to eventually replace your salary (when you retire).

Your plan will usually begin by assessing your total (combined) income and then dividing it up into several areas of expenditure:

• Mandatory Ongoing Living Expenses – monthly Bills , insurance, health etc
• Discretionary Lifestyle Expenses – expenses for food, transport,  entertainment etc
• Retention of 3 Months Expenses – an emergency cash reserve
• Fund for Wealth Creation Opportunities – to be used for shares, investments etc

Planning in this way actually creates an entry for “wealth creation” rather than it being just a case of “anything left over”.

You’ll find that it will free up funds, because you are consciously looking for opportunities to swell that part of the budget; you may find yourself reducing your discretionary spending in order to put more into a property investment, for instance, as you see your money grow. It can be adjusted over time – many plans provide free online access to make amendments as your financial status changes.

The sense of strategy and structure that a plan like this brings to your finances is a revelation to many – and all it takes is a few hours of your time.

A cash management plan needn’t be the daunting task many people imagine, and it will certainly help to centralise your finances and give you control and oversight, so that you can track whether you are on target to meet your financial goals.

The time for sound cash management is now. Contact Mike Sikar at enquiries@deltafinancialgroup.com.au to start planning for your future today.