What is the best way to manage cash flow? Do you need a monthly budget to track every single cent? Or is high-level budgeting ok? And, how much is too much to spend i.e. how do you know if you are over-spending compared to your peers? This blog will answer these questions and many more.
You cannot earn your way to improved cash flow
Have you heard the saying; “it’s not what you earn, it’s what you spend that counts”? Well, it’s true! If you have poor cash flow management habits, it doesn’t matter how much you earn, you will always find it very difficult to save money. I have met people with seven figure incomes and very little wealth to show for it. And I have clients on five figure incomes that have accumulated substantial wealth.
Of course, the more you earn, the more you can “afford” to spend on living expenses. But best-practice cash flow management is mostly about avoiding over-spending – rather than turning into a scrooge. I define over-spending as expenditure that adds very little to your standard of living (or only provides very temporary improvements). Typically, people with poor (or no) cash flow management techniques can trim expenses without it having a material impact on their standard of living.
The cost of doing nothing is too big to ignore!
Sometimes people avoid facing the truth because it’s painful. When it comes to cash flow, they avoid taking steps to manage it better because they fear (or know) they’ll have to make painful compromises.
However, you can’t make a problem disappear just by ignoring it. In fact, ignoring a cash flow problem will only make it worse. You will have to pay the price of poor cash flow management at some point. And the longer you avoid it, the more painful it will be. Worst case is that you will have to sell your home to reduce debt, be reliant on public housing and will have to live off the aged pension – which is less than $36,000 per year for a couple!
You can’t build wealth if you spend everything you earn. The good news is that 90% of people can improve cash flow management pretty easily without it impacting on their standard of living. For others, it will require a painful but necessary adjustment – but less painful than it will be if you continue to spend all your income.
Spending: minimise non-discretionary, more experiences and less “stuff”
There are two types of expenses;
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