Cash flow principles to live by
Written and accurate as at: Nov 14, 2024 Current Stats & Facts
Just as companies monitor the net flow of cash to ensure bills are paid, profits remain high, and investment opportunities aren’t missed, individuals that track and categorise their spending often find they’re better equipped to manage their money. Below, we explore a few important cash flow lessons and how they might empower you to improve your finances.
Work out how much money is coming and going
The first step to understanding your cash flow is creating a budget. Try to choose a method that you can stick to — some people like to manually track their inflows and outflows using a spreadsheet, while others prefer the convenience of a budgeting app that’s linked to their transaction account.
If you have money left over after deducting expenses from your income, you’re in the fortunate position of being cash flow positive. Achieving this regularly is a good sign your finances are tracking in the right direction.
That said, there are going to be one-off or yearly expenses (like your car registration and insurance) that threaten to derail your budget, so it pays to be prepared. Depending on how large the bill is, you might need to set money aside in advance or try to keep your expenses low for the month.
Set savings goals and consider anything extra
Once you have a clearer idea of how much you’re saving as a percentage of your total income, it’s time to find ways to boost that amount. Take a look at your discretionary spending and ask yourself if there’s anything you regret purchasing or can afford to do without.
Of course, there are limits to how much you can cut back on without sacrificing your quality of life. So if you start to notice your savings goals stalling, it might be worth trying to increase how much you earn instead. This might mean pushing for a promotion at work or looking for a new job altogether.
As your cash flow starts to improve and the money you’re setting aside each month increases, you can think about ways to put those excess savings to work. One option is to make a personal contribution to your super (for which you can claim a tax deduction), but you can choose to invest it in other ways too (such as shares and ETFs).
Free up cash by tackling debt
If you’re like many Australians, debt repayments probably feature quite prominently on the expenses side of your balance sheet. But if those repayments are eating up more of your monthly income than you’re comfortable with, it might be time to make some changes.
There are a few ways you might go about tackling debt: you could get in some quick wins by focusing on the smaller debts first, or you could address the higher interest ones to reduce the chances of them snowballing. There’s also the option to consolidate your debts into a single loan, preferably with a lower interest rate, which might make things easier to manage.
Make sure you have a cash buffer
Job security isn’t a given and medical emergencies can occur at any time, so a big part of cash flow is having money on hand to ride out any difficult periods that crop up. Conventional wisdom suggests having enough set aside to cover three to six months of living expenses, but ultimately this will depend on your personal needs and goals.
Just keep in mind that there might be tradeoffs to hoarding too much cash. For one, even if you’re keeping it in a high interest savings account, you might be passing up on investment opportunities that might be able to generate more favourable returns.