Friends, my personal belief is that the money you earn should be put towards enriching your life sustainably, over the long-term, and not a short-term blast with long-term setbacks.
Ask anyone whether they would like better finances, and the answer is almost always a resounding ‘YES’. Follow up that question with “How do you feel about your current finances?” and you’ll likely get a mix of a neutral to a negative response.
So why is there this disconnect between what people want and what is currently happening?
You could answer this with a myriad of reasons from various angles and perspectives. Today, however, we’re going to look at the one aspect of personal finance that I feel is the most important to your quality of life. As someone who has very recently left his 20s, I look back on my youth and experience with my clients so far – and I have to say that if there’s one critical skill to pick up regarding your personal finance, it’s cash flow management.
Yes, cash flow management and not investment, contrary to popular belief!
If life is a car journey, then cash flow management is your fuel management and efficiency, whereas investment is your engine. A powerful engine that devours fuel may only get you so far, whereas a small engine may chug along and eventually get you to your destination.
I’d recommend ensuring that you can at least get to your destination (comfortable retirement) first, then only worry about how fast to get there.
Someone with good cash flow will be more flexible in day-to-day expenditure like eating at a nice restaurant or treating themselves to new gadgets. With good planning, a lot of them also have more capacity for life events such as weddings, children, holidays, or even big purchases such as cars and property. They can build up to bigger emergency funds, sustain more setbacks (like Covid-19), make more investments, grow their net worth, and so on.
On the emotional side, people with good cash flow have better peace of mind. They’re less worried, happier, and sleep better. They get to focus on living life.
You might think I’m describing a rich person, but I’ve met people earning upwards of RM10,000 monthly who are struggling with crippling debt. The effect of this financial stress really shows. On the flip side, I’ve also met people earning below RM5,000, classified as B40, who are diligently allocating money into their emergency funds, investments, their first property purchase fund, and so on. The difference in happiness and outlook of life between them is very clear. Your finances should positively impact your life instead of causing you more trouble, wouldn’t you agree?
I’ll say that there are more factors involved in having your cash flow provide a positive impact on your life – but my point is that you should very much focus on good cash flow first before delving into other aspects of personal finance. Keep things simple, especially if you’re not someone who enjoys living and breathing the topic of finance.
In essence, cash flow is your income versus your expenditure. At the end of the month, do you have a surplus of income after deducting expenses, and if yes, how much?
The more you have, the ‘healthier’ your cash flow.
Step 1 – Recognise how much resource is available to you. How much nett income do you have on a monthly basis? This is usually your net salary, plus any business income. You must know this, and know this very well.
Step 2 – Follow the simple method of deducting all necessary living expenses first.
These are things like rent, loan repayments, house bills and groceries.
Be very honest with yourself though, as there are a lot of ‘commitments’ or monthly installment repayments that are actually not considered ‘necessary’.
For example, an installment plan for a new smartphone is not necessary. An argument can be made that repayment plans for the popular water filters are also not necessary. Personal loans for holidays or weddings are not necessary. Some property purchases are also unnecessary if they’re detrimental to your personal finances (and you aren’t buying them to stay in). At the end of the day, you have to be frank with yourself as to what’s really necessary and what isn’t.
Step 3 – Allocate some money towards your future. Some of you may have a bucket list of things to do, and no doubt that will require funds. A common goal for many is to provide quality education for their children. And finally, at the end of the day, there comes a point where you’ll want to retire and enjoy life. All these need funds, so the more you have prepared, the more you can do. Imagine yourself at age 60. Imagine the life that you want to have at that time, and set aside the finances for it.
Start as soon as you can, because every month or every year that goes by without you doing this is wasted time where you made zero progress towards building your life.
If we refer to the car journey analogy from earlier, skipping Step 3 is not moving your car at all!
Step 4 – Manage your day-to-day expenses. This is where you can affect the most change, and where a lot of ‘budgeting’ is usually done. Think about it, you can change how many coffees you buy per week, but you’ll find it much harder to change something like your mortgage repayment.
I’d suggest keeping track of your expenses in an app or spreadsheet if you prefer.
You don’t need to track every single expense if that’s not your thing, but at least know how much your total spending is. Knowing where your money goes is very important, and doubly so when your income is smaller. Any surplus or savings from Step 4 can then be channeled into Step 2 or 3.
Admittedly, Step 4 is the most difficult. For some of us, this requires a lot of effort and willpower. But the thing is if it were easy, everyone would be living the life of their dreams and we’d have a very different world. Please also remember not to do Step 4 before Step 2 or Step 3, because that will cause massive problems down the road.
Try your best, and seek professional assistance if necessary.
To summarise, you can visualize the steps with the following formula, worked from left to right:
Finally in closing, remember that you don’t need to be perfectly managing your finances, but you do have to start somewhere. What you need to do is start with something that you can handle first, both in terms of time and commitment. It’s like someone seeking to eat healthier. He/she should change one meal at a time and not force every meal to be a salad (because the chances of giving up are high!).
Your financial journey is a marathon, so make sure you can go the distance. All the best!