Why Cashflow is King
Whether you’re running a business or a household, there’s one thing they both have in common when it comes to money – cashflow is king.
The reality is: If you are not spending less than you earn, you will go into debt.
In the short-term, this may be manageable but if you stay in debt (or rack it up) it will snowball into a larger amount that could be very difficult to pay off and might have an enormous impact on your financial wellbeing.
Cash flow is vital to good wealth building
People building their wealth are often in the position of paying mortgages, raising children, paying school fees – the list is endless – and it’s often hard to manage cashflow.
Quite simply, a good cashflow comes from spending less than you earn after tax. The good old-fashioned idea of paying yourself first – to put money aside for strategy before lifestyle – is fundamental. Always put money away for a strategy before you start figuring out what your lifestyle should be, or what you want your lifestyle to be.
Putting some money away or getting it working for you first is the key to limiting some of your spending.
Be aware of unnecessary debt
If you are not able to cover these expenses, you will likely end up in debt. And with interest growing your debt, it may be hard to pay back – and so the problem worsens It is important to pay attention to cashflow and savings until it’s a habitual routine.
Knowing where your money is going is key. If you know where your money is going and what you are going to spend each year, it will help you in that discovery process of what’s important to you, and you can take some money from an area that’s less important to put it towards an area that’s more important to you.
Working with an adviser, you can see the straightforward impact that spending that extra money would have. They will help you look at that effect over time.
Pay you first then distribute the rest
Setting up a detailed budget is the first thing we do with our clients. We then direct them to pay themselves first with the surplus. For instance, if the surplus is $1400 a month, we suggest they put it into debt repayments, investments, or superannuation.
After that, money is allocated to other areas such as bills, travel, loan repayments, and an emergency fund that equals about six months of income.
This budget should be reviewed regularly to adjust to changes in your situation.
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