If there was one thing that I could insist schools teach students when it comes to financial concepts, it would be about cash flow. Poor cash flow is the single biggest reason small businesses fail and why people do not achieve financial freedom.
Therefore, is there was one single area and strategy that you should understand and master on your journey to financial freedom, it’s measuring your business and personal cash flow.
Managing your personal cash flow
Most business owners are not in control of their personal cash flow. They are used to paying everyone first in their business that they apply this to their personal cash flow situation.
Therefore, most people have the following set up when it comes to their personal cash flow:
Salary/Pay – Bills/Living Costs = Amount to save or invest (what is left over)
A concept that I use for our clients and that has been written about in personal financial circles is a called ‘pay yourself first’. Essentially, all you do is change around the setup to become:
Salary/Pay – Amount you save or invest = Bills/Living Costs
The concept only works if you apply it on a regular basis (usually weekly or fortnightly, put your investments/savings cash flow into a seperate account and invest or save on a regular basis (usually quarterly).
Let’s take a look at an example:
Pay yourself first approach
Bill and Betty pay themselves a salary of $1,500 each per week. They receive $1,144 after tax per week ($2,288 combined) or $4,957 per month ($9,914 combined per month), based on 2016/17 personal tax rates.
Having worked with their financial adviser, they have put together their own budget (I call it their net cash number – more on that concept in another article). This budget forecasts their living expenses and their mortgage repayments. It shows that they could save 20% of their salaries comfortably.
Therefore, each week, Jim and Barbara transferred 20% of their net pay ($2,288 x 20% = $457.60) into another personal account – not their normal transaction or daily account.
Over the course of the quarter, this money builds up to a nice little amount of 5,491.20 ($457.60 per week x 12 = $5,491.20) and an even nicer amount over a period of one year ($5,491.20 x 4 = $21,964.80).
Without a pay yourself first approach, Bill and Betty’s cash flow would be spend, used to pay for bills or wasted on living expenses that provide short term gratification. Applying a pay yourself first concept gives Bill and Betty a fantastic start on their journey to Financial Freedom.
If they apply this concept as well as knowing the dollar value of assets they need to achieve Financial Freedom (outlined in a previous article) they are well on their way to achieve success.
Why is it that people do not achieve their financial goals? Is it that the rewards are not great enough motivation? Financial Freedom means having the time to do what you want, when you want, with who you want in a manner in which you want to.
That sounds pretty cool to me!
It starts with cash flow and it starts with a process and a structure that you can use to pay yourself first.
The rewards are there, its up to you to get started.