The secret of managing cash flow
The secret of managing cash flow
At Christmas most people normally spend more money than usual. With this in mind, we thought it may be a good time to talk about cash flow management.
If you asked 100 people whether savings and investment for the future is important to them, 99 of them would say yes. So why is it that so few people can manage their cash flow well enough to have money left for savings and investment?
We tend to spend money in one of 2 ways. We either act on impulse or through consideration. With an impulse purchase we really don’t put a lot of thought into the decision and attach very little guilt at that moment the money is spent. The purchase results in instant gratification but as a result we often spend more than we can afford.
When spending money based on consideration we decide to spend the money because the advantages outweigh the disadvantages. We take the time to weigh up the advantages and disadvantages and make a carefully considered decision based on this.
The problem is that most money is spent on impulse and not on consideration and as a result we tend to run out of money very quickly. What we need is a simple system in place to manage our spending.
Let’s say if you’re one of the 99% of people who believe that savings and investment are important. To ensure that its importance gets realised regardless of the circumstances and how you might spend your money, you would probably need a system to put away a certain percentage or certain amount of your income each month; almost like you didn’t receive it in the first place.
For example, if you have £100 coming in, before you even put any money towards your food and basic needs you would put away, say, £10 into your savings and investment account. You could technically put away money in a similar fashion for anything major such as a holiday, Christmas or a wedding. The actual percentage or amount is not as important as the habit itself, you may start from as little as a few pounds.
You may ask why I even bother talking about something so basic? Well put simply we are just not doing it. We may think we understand it, but if we are not doing it, we don’t really know its power. In fact, automatically putting money away for some kind of purpose is one of the hardest things to do.
First of all, we often don’t believe that we have extra money to put away as we’re already short as it is, but we forget the fact that we have always found money for things that are absolutely important to us. Why not make savings and investment top of the list since they’ll eventually give us more money to spend on other things?
Secondly, we seldom realise the importance of following a system. We all want our freedom to do things but there is no such thing as freedom without control. You never get a one-sided coin.
You may wonder why we are suddenly talking about cash flow management when we normally focus on the importance of capital growth as a wealth generating investment tool. Well over the last few years we have seen many people become involved in residential property investment because of the tremendous growth in the value of their homes. Some people become property investors thinking it’s an easy way to make more money. What we have noticed is that in general only the people who have already developed a good habit of managing their money on a daily basis have done really well.
On the other hand, there are people who have not put savings and investment as their high priority, they still keep their old spending pattern and never put a cash flow management system in place. Many of them end up spending most of their capital growth and rental income from their properties, in other words, they have not really moved ahead, some of them have even gone backwards, not due to bad performance of their properties, but their own habit of mismanaging their money.
So for those who have not developed a system for managing their cash flow, maybe this January is a good time to start, come up with a simple budget and see if you can have some fun with it.