We live in a world where there are more and more external things that keep much of our financial life out of our control. The stock market, government regulations, tax policy, interest rates, inflation, terrorism and rising health care expenses leaves us in a continuous state of fluctuation. This perpetual state of fluctuation often leaves us confused and searching for a way to establish more control over our money.
One area of our financial life where you do have control is how you spend and save the income you receive.
How you save and spend your money as it flows in and out of your life is called cash flow.
Cash flow is the lifeblood of your financial life. It is what enables you to fulfill responsibilities and luxuries now and for the rest of your life.
Your cash flow may be funded by employment or a business or it can be income generated from your assets. Regardless of its source, you have cash flowing through your hands and it is either flowing out of your control or into your control.
Your cash flows into 3 primary areas: Reoccurring obligations, Irregular obligations and Savings (Storage).
- Reoccurring obligations are those financial transactions that occur on a regular basis often considered part of a budget.
- Irregular obligations are those financial transactions that occur less frequently but would be part of your planned expenses throughout a calendar year.
- Savings would be the amount of money over and above your obligations that you do not need now but will store for a future purpose.
Having a working knowledge of your cash flow helps you establish flexibility, access and control of your money, which can allow for more money to be retained and utilized during their lifetime and for future generations.
The sooner you identify what money is flowing out of your control, the sooner you can have more money flowing into your control.
Consider the things you do on a regular basis where you give up control of your money:
- When you spend money it is gone forever.
- When you finance a purchase, you forfeit control of a portion of your cash flow over to a bank.
- When you invest money in the stock market, you relinquish control over how much you earn or how much you will get back.
- When you store money in a bank, you allow the bank to have control over the money you deposited with little if any return.
Everything is about cash flow! And the sooner you identify what money is flowing out of your control, the sooner you can begin to make adjustments in how you manage your cash flow to have more money flowing into your control.
In other words, once you understand the reason why you are spending or storing money, you can then begin to take back control of your money and your financial life.
When it comes to storing money, you need to answer this question – How will you actually use the money you are storing (what is its purpose) and when exactly will you need it? Consider such things as new automobiles, home improvements, college tuition, and retirement, which are all part of your future cash flow. You need to be able to answer these questions to establish control of your money.
- Why are you saving?
- How will you use the money?
- What is its purpose?
- When will you need it?
Think of this as planned chronological spending and saving. While many people think in terms of weeks or months, to be effective in maintaining control of your cash flow it is recommended to think in terms of years.
Here are 2 primary reasons (purposes) for saving (storing) money:
- For You To Spend! Store money to spend on “Big Ticket” items such as an automobile, college tuition, home improvements or other large expense that you would either save for or otherwise finance. The purpose of this stored money would be to spend it in large chunks.
- For You To Use For Income! Store money to use as an “Income Source” to supplement your income. The purpose of this stored money would be to have a proverbial golden goose that generates income to fulfill your cash flow obligations as you transition into retirement.
In other words, once you understand how you will ultimately use the money, you can strategically store it to fulfill its intended purpose.
If the money is being stored to spend then we must protect its principal. If the money is going to be used as an income source now or in the future, we must protect the income.
This approach places the control of your money in your hands. By knowing how you will ultimately use the money you can strategize to help grow and protect the purpose of your money.
The key to cash flow planning is to have money available when you need for the rest of your life! Isn’t that what we all want?