Understanding (and Increasing) Your Cash FlowBy Randell Tiongson on October 21st, 2015
For today’s blog, let’s go back to basics. A lot of beginners to personal finance can feel overwhelmed because of all the options, like which investment to get or which bank to choose. But before you start on any of that, you must have a healthy cash flow first.
“The inflow of cash should always be greater than its outflow.” It sounds simple, but many people don’t have this step down yet. If you’re living paycheck to paycheck, then your inflow is exactly equal to your outflow. If you’re living paycheck to paycheck and you have debts, then your cash flow is negative.
This is where having a healthy cash flow comes in. Learning how to manage your cash will be the single greatest factor in improving your financial future, because if you don’t have extra cash, how can you start saving and investing?
In personal finance, cash flow is all about income and spending. If you’re spending more than you earn, you’ll have a negative cash flow. How can you improve this? Earn more, spend less.
Again, sounds simple, but it’s not that easy to do. To help you out, here are a few ways you can improve your cash flow:
1. Make more money. The most straightforward way to have more money is, well, to make more money. So invest in your best asset — yourself! Read books, widen your knowledge, improve your skills to expand the range of income streams you can have. For me, it was reading books that improved me; I became a better writer and teacher through reading, and I also learned a lot of things directly or indirectly related to my profession. Having more marketable skills will increase your earning power and positively influence your cash flow.
2. Invest in learning. This is a part of investing in yourself. The more you know, the more ways you can find to make money. Whether that’s by improving yourself in your current company or learning ways you can start your own business or sidelines, learning is an investment that will never go to waste.
3. Be enterprising. I’ll admit that I don’t think entrepreneurship is for everyone. However, I still think that more Filipinos can go into entrepreneurship. But it’s important that you go into it armed with knowledge — among others, you should read about the business you want to get into, observe the market, make sure your business plan is solid, and have an exit plan. It would also help to start small, such as basic buy and sell or commission selling. There are many opportunities for the beginning businessman (or woman); these 9 businesses you can start for less than P50,000 is a good jumping-off point. The number of SMEs in the country is increasing, and it’s always heartening to hear success stories. If you prepare correctly, and with God’s grace, you could be one of them. A successful business or sideline will do wonders for your cash flow.
4. Spend less money. Making more money takes time and effort. It may take months for you to get that pay raise, or even longer for your business to start raking in profits. You know what takes less effort and has immediate effects? Spending less money! I’ve said it so many times that you might feel like I’m a broken record, but it’s still true — the way to wealth is spending less than what you earn and investing the difference. If you do this for the long term, you’re sure to meet your goals.
While it may take objectively less effort to spend less than to make more, it also feels a lot more painful. We Filipinos have a culture of spending. How many times have we promised ourselves that we’d be more diligent about spending, only to go out and make unnecessary purchases?
The thing we must remember is spending on things we want, as pleasurable as it might be, is only temporary. This doesn’t mean that you should never spend money on “unnecessary” things, but you should never let it affect your financial well-being. Track your spending, identify where you can cut back, and control your spending — don’t let it control you.
Ready to get a handle on your cash flow? Having read the above, you can start by preparing a budget so you can see where your money is going and what your net cash flow is every month. Cash is the lifeblood of personal finance, so make sure yours is healthy.
Tip: Learn how to manage your finances better by reading my book No Nonsense Personal Finance: A Step by Step Guide. To order, send us an email [email protected]