Steps to Build Good Cashflow

Cash-flow at its essence is basically your income versus expenses. 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.

Here’s a 4-step method to improve your cashflow.

• Step 1 is recognising how much resource is available to you.

How much nett income do you have on a monthly basis? This is usually your nett salary, plus any business income. You must know this, and know this very well.

• Step 2 is then to follow the simple method of deducting all necessary living expenses first.

These are things like rent, loan repayments, house bills, basic food. Be very honest with yourself though, as there are a lot of ‘commitments’ or monthly instalment repayments that are actually not considered ‘necessary’. For example, the instalment plan for a new phone is not necessary.

Arguments can be made that the repayment plans for the popular water filters are also unnecessary. Personal loans for holidays or weddings are not necessary. Some property purchases are also unnecessary if they detriment your personal finances (and you aren’t buying it to stay in). At the end of the day, you have to be frank with yourself as to what is really necessary and what is not.

• Step 3 is to 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 a lot of us is that we want to provide a quality education for our children.

And finally, at the end of the day there comes a point where a lot of us will 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 Step 3 is basically wasted time where you made zero progress on building your life.

• Step 4 is managing your day-to-day expenses.

This is where you can effect the most change, and this is 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.

In Step 4, I would suggest keeping track of your expenses in some form of app or spreadsheet, if you prefer. You do not 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 Step 3.

Folks, Step 4 is admittedly the most difficult. For some of us this will require 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 visualise the steps with the following formula, worked from left to right:

Total Income – Essential Living Expenses – Savings for Future = Balance for Discretionary Expenses

Finally in closing, remember that you do not 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 find 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 then chances of giving up are high!).

Your financial journey is a marathon, so make sure you can go the distance.