Regardless of your age, cash flow determines your choices. Everyday decisions such as what we spend, where we live, and the destination of our next vacation are all cash flow based. Cash flow arrives from various sources including full-time employment, a side hustle, and an investment portfolio through retirement. Cash flow is the dominant theme that influences what we save, invest, and spend.
Cash flow is not always guaranteed, it’s lumpy and can be higher or lower than we may like at times. It’s a funny thing that takes time and practice to understand. Some master their cash flow while others are controlled by it. The best lessons we learn often include the mistakes we make with our cash flow.
Cash flow often correlates to the amount of time we spend working. As the number of hours expand on a project, the larger expectations we have with our cash flow. When work stops and we slow our pace, the amount of resources we’ve accumulated will determine what cash flow choices are available to us.
Cash flow is not budgeting, these two terms are often confused for one another. Budgets are nice and initially assist in outlining expenses, but often can’t be followed in real world spending. It’s not just investors, even the Federal Government has difficulty staying on budget. I believe general spending is challenging as expenses often vary month to month. Add in surprises and rising costs and all our spending looks very different today than it did just several years ago.
In its essence, cash flow is the movement of money. Both in exchange for our time when working and for spending and investing as we live our life. Cash flow accomplishes something budgets often fail to address, providing room for error and planning margins. Built in flexibility is what distinguishes cash flow from budgeting. Real life spending and savings is not a straight line and doesn’t always fit neatly onto a spreadsheet for budgeting purposes.
Ok, so how can we make the most of our cash flow regardless of our age? The key is providing each account a specific job description. Co-mingling accounts to serve multiple objectives is problematic. Every account should serve a single purpose. Annually checking in on each account ensures it continues to do the job it was previously assigned. Understanding that it’s ok to re-purpose an account as priorities and timeline shift, remaining flexible is important.
Awareness on the tax impacts of each of your accounts allows cash flow to work in all tax environments. Taxes make an impact and knowing when and what’s due in relation to your spending and investing is critical. Cash flow works better when we’re alert to the various taxes in ongoing planning.
The act of planning, revisiting your cash flow once a year or perhaps every six months will tell you what’s working and what’s not. How are cash reserves compared to long term investments? What big ticket purchases are on the horizon? A financial plan is nice but becomes less effective after it’s created, and time passes.
The art of ongoing planning includes updating your financial plan to reflect on decisions, investments, and how to best utilize cash flow. What trends are becoming apparent? Reoccurring themes are revealed over time as this approach works at all levels of wealth.
Investors may get the most from their cash flow by building and spending their wealth with purpose. Everything begins and ends with cash flow. Embracing and revisiting a repeatable process may provide more choices for you today and tomorrow.
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