As the Covid-19 pandemic hit and many individuals were laid off, a new focus on personal finances crashed to the forefront. For many, this meant tightening their spending and cutting some extras.
But for others, it was devastating. Some found they hadn’t managed money well or saved enough for a rainy day, and they faced serious hardship.
Pandemic aside, learning the important strategies of wealth management are key to saving and planning for the future. Understanding the role of cash flow in your finances is key to building a strong money management plan.
Read on to learn more about cash flow and how it can build a strong wealth management strategy for you.
The Role of Cash Flow in Wealth Management
Before we get into semantics, let’s use an example to understand the role of cash flow in your overall financial picture.
Have you ever sat down with someone younger and tried to build something with Legos? If the person was a toddler, the Legos were big clunky pieces and you probably didn’t need a lot of direction. They fit together and you made simple towers.
This is much like your financial picture early in life. You get your first real job and start making money.
You probably don’t have investments yet, or much debt either. The big Legos are your current cash flow. You use them, but you aren’t building anything too specific and your financial picture isn’t too complicated.
As time goes by, that changes. Now sit down to build Legos with a 10-year old. It’s a whole kit with complicated, step-by-step directions.
Each of those pieces is part of your overall financial picture. The key to making all those pieces fit into something relies on the directions. The directions represent your cash flow.
Without a clear handle on your own cash flow, it becomes difficult to create a strong wealth management plan. The same would be true in building that difficult Lego kit. No directions make it very challenging.
What Is Cash Flow?
The key to your whole financial wealth management plan is understanding your personal cash flow.
Some people assume that cash flow is simply where their personal money goes. It comes into their accounts. It goes out to pay debts, savings, and maybe investments.
There’s a belief that where the money travels through a monthly budget is the cash flow.
Actually, cash flow is bigger than that. Imagine it like moving two big steps away from the budget.
Go back to the Lego example for a minute.
Remember, those directions were key to building the structure. The directions represent your cash flow. It is key to building your overall wealth management plan.
Where you put your cash flow, how you spend it, invest it, and designate its use determines your wealth management strategy.
Why a Cash Flow Strategy Matters
It can be beneficial to step back and look at how you manage wealth through your cash flow.
If you’re on top of your financial game, you start with a budget. Budgets tend to be detailed and show more specifically where your money goes.
It doesn’t account for how your money can grow when you use cash flow in certain ways. This turns your simple line-item budget into wealth management.
Of course, it can be hard to have control of your actual cash flow without a firm handle on spending, debts, and your budget.
For example, if you spend more than you make and constantly juggle payments and credit card balances, you can’t garner a firm grip on cash flow. In most cases, you don’t feel like you have any.
Let’s take a step back and make sure you have a firm budget in place. This will help you to understand your personal cash flow.
In the simplest of terms, the cash flow represents your income minus the expenses you have over a period of time. The key is the period of time.
You want to be able to take your cash flow and use it over a period of time to make wealth for yourself and achieve your financial goals.
Many experts suggest starting with the 50-30-20 rule. Start by tracking your expenses for several months so you can see where you spend your money.
Start with the 20. Have you ever heard someone say to pay yourself first? Start by taking 20% of your take-home pay and putting it into savings or investments.
50% of your income will cover those basic required needs. This will include things like:
- Mortgage or rent
- Transportation costs
- Insurance costs
- Loan payments
Then you have the 30% left. This is where you must do some goal setting as part of your financial plan.
Do you have other needs? Do you have long-term goals that require you to save that extra 30% for a period of time?
Creating Your Financial Plan Based on Cash Flow
Most businesses use cash flow statements and balance sheets to manage their money. You should create a personal cash flow statement and a personal balance sheet.
These documents will become key to understanding your cash flow and the goals that come with it.
The cash flow statement can look a lot like a budget, except it should be a continuous statement that shows the money that comes into your life and the money that goes out.
Remember, you want to use your cash flow to help you achieve those long-term financial goals. This might include things like planning for retirement or saving for college.
You should also have a personal balance sheet. Your balance sheet should provide you with an overall snapshot of your wealth at any given time. This will help you to see how you’re doing using the cash flow you have to reach those goals.
Cash Flow Wealth Management Tips
Having a concrete wealth management strategy means understanding your personal cash flow and the role it plays in helping you to achieve your goals.
At Bogart Wealth, we can help you plan this strategy for the future. Contact us today to get started working on your financial plan.