Success is an accumulation of LITTLE successes in life…
Posted On September 26, 2010
Having a positive cash flow is an essential step in gaining financial freedom. I did not realize it at first. It was only after I have read the Rich Dad’s series by Robert Kiyosaki that I have realized the importance of maintaining a regular cash flow and expenses that does not exceed it. I have to ensure that this positive cash flow not only comes consistently, it should be increasing.
Basically, there is two ways to increase the positive cash flow. The first way is to earn more and maintain the existing expenditure. The second way is to reduce wastage. Usually, a combination of both methods can be used to achieve a better positive cash flow.
For example, I am currently earning 00 per month. My monthly expenditure is 00. Since my income is more than my expenditure, I am deemed to have a positive cash flow of 0. If I want to increase my cash using the first method, I can take up another part time job or assignment to earn an extra 0 per month. As a result, my positive cash flow has increase from 0 to 00.
If I am using the second method, then I will be examine my existing list of expenses to identify which ones are unnecessary or redundant and do away with them. In other words, I am reducing wastage in my existing expenditure.
For example, I am currently subscribing to a particular magazine. I wanted to read the magazine but I never seem to have time to read it. So the weekly issues of the magazine just keep piling up untouched. That is I am wasting my subscription fee altogether. When it is time for renewal of subscription, I should simply stop the subscription altogether and save the money. However if I am not aware of my wastage, I will simply renew the subscription thinking that I will find time to read the magazine.
My expenses can be classified into fixed and variable. As its name implies, fixed expenses are those that I have to consistently pay every month like my loans and mortgages. My variable expenses are expenses that are not consistent, like entertainment, food, vacation, clothes and such. Wastage is usually found in the variable expenses.
Reducing wastage is quite different from bad spending habit. Bad spending habit is a habit of spending on unnecessary things even though I am aware of it.
For example, when I see a shop that is on sale, I will go and spend money simply because there is a sale. I know that these products or services are not necessary but I do not care because I cannot control my urge to spend. I simply have a habit of spending on seeing a sale sign.
By reducing wastage or increase income, I will be able to gain more positive cash flow. Yes, I can invest my excessive cash due to positive cash flow in assets that generate passive income as learned from the Rich Dad’s series by Robert Kiyosaki. But before I do any investment, it is important that a few fundamental things are handled first.
Firstly, I will save the excess cash as emergency funds. Based on my understanding of personal financial planning, I should have an emergency fund equivalent to 3 to 6 months of my monthly expenditure. In case of any emergency that cause me to lose my income, I can still survive based on my emergency cash for 3 to 6 months. In the meantime, I can look for an alternative source of income.
Secondly, I will use the money to insure myself again risks. Insurances such as life insurance, personal accident insurance, medical insurance and so on should be used to manage the risk of great financial losses due to unforeseen circumstances.
For examples, if I have an accident and I do not have any personal accidental insurance, then I may end up paying a heavy sum of medical fees due to injuries. If I become sick and I do not have any medical insurance to cover me, I will end up paying a large amount of medical fees.
When the above two things are done, then I will consider investment provided that I do not have any existing liability. If there is any existing liability, then I will need to judge whether it is wiser to pay off my liability first or use the money for investment. As a thumb of rule, if I cannot guarantee the rate of return for my investments is more than the loan repayment interest amount, then I will be better off by paying for my debts.
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