Due to the impact of coronavirus, many people are having to navigate unexpected changes in income and expenses for the first time in their life. This is something I have been talking about over the past few weeks with clients, during presentations and podcast interviews.
Cash flow management is the cornerstone of successful wealth accumulation. It doesn’t matter how much you earn, if you don’t manage cash flow effectively, it’s unlikely that you will be successful with building wealth. I have seen clients with 7-figure incomes that have little wealth to show for it. Conversely, other people with relatively modest incomes but very good cash flow management practices, have successfully accumulated a lot of wealth.
Managing cash flow does not have to be painful
The topic of cash flow management feels painful to many people. It tends to create connotations of curtailing expenditure on all the fun things in life. However, in the main, that is not the case.
The main aim of best-practice cash flow management is to eliminate unconscious expenditure.
Conscious versus unconscious expenditure
Most people do not consciously make bad financial decisions. Therefore, the insidious consequence of not tracking cash flow means that money ‘disappears’ on items that add very little enjoyment to your life. As such, eliminating this unconscious expenditure not only saves you money, but is likely to have very little impact on your standard of living.
You cannot manage what you do not measure
The best way to eliminate unconscious expenditure is to measure how much you spend in total on all discretionary items. You do not need to track every single expense, just a monthly or fortnightly total.
I typically like to allocate expenses into seven categories.
Non-discretionary expenses
1. financial commitments, such as rent, mortgages, car leases and child support.
2. utilities, including costs for gas, electricity, rates, phone, water, internet and contents insurance.
3. health and education, such as school fees, health insurance, medical expenses and child care.
Discretionary expenses
4. shopping and transport, like food, clothing, beauty, petrol, car maintenance and public transport expenses.
5. entertainment, including spending on annual holidays, gifts, eating out, movie
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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