Managing Personal Cashflow

As defined by Investopedia a personal cash flow statement measures your cash inflows and outflows in order to show you your net cash flow for a specific period of time. In mathematical terms it can be defined as:

Cash Inflows - Cash Outflows = +-Net Cashflows

Given this definition, positive net cash flow could mean savings. Take note though, in order to maintain a positive cashflow or beter yet increase it, one need to increase cash inflow and manage cash outflow. We cannot increase our cash inflow and also increase our cash outflow the same rate as how much our cash inflow increase. The latter are prerequisite to each other.

Most often than not, our worst enemy when it come to savings is non other but ourselves. If we used this formula in order to have savings, we will probably end up broke, perhaps, it's because our brain is wired to instantly gratify our wants - that is we desire to experience pleasure or fulfilment without delay or deferment, basically, it’s when we want it; and we want it now. Consider this, suppose just before we receive our next salary we still have 100 dollar left. But then, while roaming around we came across a 50% sale of our most desired shoes. The price before sale was $200 and now it dropped to $100 and we still have extra $100 in our pocket, some more last day of sale, will we miss it? Probably not.

That's why as Warren Buffet once advice "Don't save what is left after spending; spend what is left after saving". In this regard, we probably need to alternate the formula as per below:

Cash Inflows - Savings(+Net Cashflow) - Expenses(Cash Outflow) = 0

I guess with this formula we are able to trick our brain to save effectively.

Cash inflow could be our salary, cash generated by doing part time or overtime, whilst cash outflow could be our daily expenses.

It is recommended to save at least 20% of our savings and live by the remaining 70% of it. For the balance 10% more or less, it is advised to give out or share 10% more or less of our income or as we wish and able to those who are in needs and or to the poor. Learn to give it willingly and cheerfully. It is for us to recognise that we are all interconnected and interdependent. We cannot to create any amount of wealth just by our own efforts. Even an artist needs the raw materials for paint or to sculpture, and an author needs pen and paper. Giving and or sharing what we receive is a way of recognising that in the process of building wealth, we have an unseen partner (Our God) who is there to support us in achieving our goal. We certainly want a good relationship with our partner right? By sharing and giving part of what we receive, It pleases Him, as the verse say; "He who gives to the poor will not lack, But he who hides his eyes will have many curses" Proverbs 28:27 NKJV. And, at the same time, it will help us check constantly our attitude towards money, help us to be humble, check our pride, be generous along the way and it will remind us always not to give in to whatever temptation that may come along the way. It good to note that, the 10% serves as a guide only. We can start lower than that or higher than that, the idea is rather simple, the time will come when, say we start at 3% and this is the best we can give without affecting our personal obligation, if we are continually blessed, there will come a time that this 3% will be nothing to give. Should that time comes, it's best to increase it to such that we feel the sacrifice of giving without affecting our personal obligation and continue to increase it should that feeling of sacrifice vanishes again because, that feeling of struggle and or sacrifice to give will remind us always not to be complacent, that there is someone helping us and we don't own anything, that feeling of sacrifice will remind us always to be humble, check our pride and not give in to the temptation that may come along.

Also, should we ought ourselves to give some portion of what we receive, we should also be compelled to plan on how to spend and or allocate effectively the remaining balance. Should we oblige ourself to give but did not bother to plan how we spend the remaining balance, we might just end up in deficit meaning, we over spend and might end up owing someone. For me, the joy of giving and the blessing that comes along with it will only really show if, we simply learn to discipline ourselves on how we allocate and spend the remaining balance of our resources after we give. God's blessings are not short term, by learning to discipline ourself on how we allocate and spend our resources effectively, we are in for a long term blessing that we can even pass down to our children's children.

So now the formula is as per below and as per my experience, whether you have and existing debt to pay or not, use this formula as soon as possible. 

100%Income - (10% plus/minus)giving - 20% savings - 70% expenses = 0

Now, I knew somehow following the formula strictly will not make sense. Like say, what if we have a debt to pay, would it be better to, instead of saving the 20%, use it first to pay off the debt since that debt will incur interest and then start saving after paying off debt. The reason why its better to try our best to stick to the formula whether we have debt or not is that, it will force us to think of ways how to increase our income to such that the 70% expense will include all bills including the amount needed to pay off debt. The earlier we start will also help us build that habit within us and get use to it rather than waiting up to until the debt has been payed off, its possible that by that time, we might be already lazy or not keen to follow the formula. Let's not procrastinate, if we have the enthusiasm now to follow the formula, let's do it! Think of that 20% saving as like an expense as if we are paying off a bill whereby every time we pay it, our brain automatically conditioned that it will not come back. Like say for me, I think of it as like I'm paying a tuition fee, I'm compelled to pay it and I don't feel regret every time I make payment and I knew that it will not come back. I treat the 20% saving the same way the tuition fee, the only difference is that it goes to the asset column instead of going the liability column. The earlier we apply the formula and by repeatedly doing it, it will become a system of habit.

The 70% percent requires a close monitoring of how we spend it and that is through effective budgeting. It may sound simple, but it really is not easy in practice. It requires discipline and a system where you and the ones involve in it are comfortable to do. There are a lot of tips and how to do it instructions available online but I believe every individual have unique character and different needs. So, adapt tips and procedures that you think best suit and effective for you and the people involve in it.

Hope this will help.

The Importance of Emergency Fund

Why do we need to understand the importance of EMERGENCY FUND before proceeding to investment?

Perhaps, one of the reason is to avoid touching our investment intended for long term. 

Consider this, let's assume we manage to make our cash flow positive and able to manage our debt but then decided to jump right away to long investing without really understanding the importance of EMERGENCY FUND. And, let's assume that at this time, we decided and make it a goal to retire with sufficient savings to cover for our own expenses at the age of 65. 

During the 12 years of working and investing we were satisfied with our investments earning. Assuming that our investment from PHP100,000 at an average of 12% compound interest ballooned to 400,000. However, about this time an unexpected emergency happen, perhaps we lost our job or one of family or ourselves got sick. 

Where do you think is obvious choice to fund our emergency? Say, we only needed PHP300,000 to settle our emergency and decided to get that from our investment earning. We didn't lose, right? Since we still manage to retain our capital. 

Yes, indeed our capital will be retained at that point in time but, our biggest lose will be the 12 years of letting our money compound for itself. At that point in time, we just LOSE 12 YEARS towards our retirement age goal.

Another obvious importance of emergency fund is that it will serve as our buffer fund whenever we encounter an unexpected circumstance in life such as temporal lose of Job or minor medical needs that requires immediate liquidation of cash. This is why it is advise to just place this fund in a savings account for easy liquidation, we just need around 3-6 months of our expenses to be place in a savings account for our buffer fund. Now, for major emergencies this fund may not be enough especially like hospitalisation need or expenses, we certainly don't want to top up this fund using credit to settle such emergencies. It would be wise therefore for us to get a medical insurance, this will back up our emergency fund or, perhaps our emergency fund will not be touch as usually, if we know how to pick a medical insurance properly, it would be enough to cover such emergencies. Once the 3-6 months worth of expenses has been save in a savings account, the rest should be diversified to other investment vehicle like say mutual fund, property, insurance, stocks and business.